House of Representatives

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)

13 Other provisions relating to conduct etc

Preliminary

13.1 Proposed Part 7.8 contains provisions relating to the conduct of financial services licensees as well as miscellaneous provisions relating to other conduct connected with financial products and services.

13.2 Broadly it provides that licensees will be required:

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to establish and maintain a separate account in which to hold client (both retail and wholesale) funds;

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where they hold funds or assets on behalf of clients, to provide periodic statements to clients;

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to keep financial records that correctly record and explain the transactions and the financial position of the financial services business carried on by a licensee;

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to prepare profit and loss statements and balance sheets and lodge them with an auditors report with ASIC;

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to give priority to clients orders; and

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to disclose and obtain client consent when they will be acting on their own behalf in a transaction with a non-licensee.

13.3 In addition, a prohibition on unconscionable conduct in the provision of financial services will apply.

13.4 Proposed Part 7.8 will replace the following Parts of the existing Corporations Law:

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Part 7.5 (Dealers Financial Statements and Audit);

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Part 7.6 (Money and Scrip of Dealers Clients); and

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Section 1209 and Part 8.5 (Financial Statements and Audit).

13.5 It will also replace related concepts in the IABA (which will be repealed in its entirety).

Dealing with client money

13.6 Division 2 of proposed Part 7.8 sets out the obligations of licensees in relation to client money and loan money. It also deals with the powers of the court in relation to accounts containing client money and loan money.

Money other than loans

13.7 Licensees will be required to establish and maintain a separate account in which to hold client money.

13.8 Client money is defined as money paid by a client, by a person acting on behalf of a client or for the benefit of a client in connection with a financial service that has been provided, or that may or will be provided to a client, or a financial product held by the client (proposed subsection 981A(1)).

13.9 The following is not client money:

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money received as remuneration (proposed paragraph 981A(2)(a));

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money paid to reimburse a licensee for payments made to acquire a financial product or to discharge liabilities incurred by a licensee relating to the acquisition of a financial product (proposed paragraph 981A(2)(b));

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money paid to acquire a financial product issued or sold by the licensee (proposed paragraph 981A(2)(c)); or

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money paid by way of a loan (proposed paragraph 981A(2)(d)).

13.10 Proposed subsection 981A(4) will enable regulations to be made that exempt money paid in specified circumstances from requirements relating to client money or apply these requirements as if certain provisions were omitted, modified or varied.

13.11 Accounts established to hold client money must be with an Australian ADI or such other account as prescribed by regulation and must be designated as an account for this purpose. Only client money, interest on client money and proceeds from the investment of client money may be paid into accounts. Money must be paid into accounts on either the day it is received by the licensee or the next business day (proposed subsection 981B(1)). Additional requirements in relation to accounts may be imposed by regulation (proposed paragraph 981B(1)(c)) or as conditions attached to the licence of a financial services provider. For example, in certain circumstances the regulations or licence conditions could require that the account be a trust account.

13.12 Proposed section 981C will enable regulations to be made dealing with the circumstances in which payments may be made into or out of accounts, minimum balances to be maintained in accounts; how interest on accounts is to be dealt with; and how proceeds from the investment of client money are dealt with. These regulations will enable provisions currently contained in IABA relating to the circumstances in which insurance brokers can invest money held in broker accounts to be transferred to the new regime.

13.13 Special provisions will apply to client money relating to derivatives. These will enable client money to be used to meet obligations incurred by the licensee in connection with dealings in derivatives on behalf of the licensee, including dealings on behalf of people other than the client (proposed section 981D).

13.14 The following provisions also relate to the holding of client money by licensees:

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protection of client money from attachment (proposed section 981E);

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a power to make regulations dealing with how client money is to be dealt with if a licensee ceases to be licensed (proposed subsection 981F); and

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no liability for an Australian ADI or other institution with which an account is held merely because of a licensees contravention of these requirements (proposed subsection 981G).

Loan Money

13.15 Licensees will be required to ensure that loan money received from clients in connection with the activities authorised by a licensees licence is paid into a separate designated account with an Australian ADI. This must be done on either the day the loan money is received by the licensee or the next business day (proposed section 982B).

13.16 Licensees must to provide clients with a statement setting out the terms and conditions on which the loan is made as well as the purpose for which the money will be used. Licensees will be unable to withdraw loan money from designated accounts before receiving a written acknowledgment from the client that the client has received such a statement (proposed section 982C).

13.17 Licensees may only use loan money in accordance with the statement provided by the licensee to the client or for another purpose subsequently agreed in writing between the licensee and the client (proposed section 982D).

Powers of Court

13.18 Proposed sections 983A to 983E set out the orders that a court can make in relation to accounts established to hold client money and loan money. These provisions are based on existing Corporations Law sections 874 to 878 and 1224 to 1227. They will enable a court to make a number of orders in relation to accounts, including orders to freeze accounts and orders relating to the payment of money from accounts.

Dealing with other property of clients

13.19 Division 3 of Part 7.8 of the proposed Bill sets out the obligations of financial services licensees where they are given client property (other than money). These provisions are based on sections 873 and 1214 and subsection 1209(6) of the existing Corporations Law.

13.20 Licensees will be accountable for client property given to them in connection with the provision of a financial service to a client or a financial product held by a client (proposed section 984A).

13.21 Proposed subsection 984A(2) will enable regulations to be made that exempt property given in specified circumstances from the requirements of Division 3 or that apply Division 3 to property given in specified circumstances as if specified provisions were omitted, modified or varied as specified in the regulations. Regulations may also place conditions on exemptions and provide for the consequences of a contravention of a condition (proposed subsection 984A(3).

13.22 Licensees will be required to ensure that client property is only dealt with in accordance with the terms and conditions on which the property was given to the licensee and any subsequent instructions from the client (proposed paragraph 984B(1)(b)).

13.23 Special provisions will apply to property relating to derivatives. Following the approach adopted in proposed section 981D, these provisions will enable client property to be used to meet obligations incurred by the licensee in connection with dealings in derivatives on behalf of the licensee including dealings on behalf of people other than the client (proposed subsection 984B(2)).

Special provisions relating to insurance

13.24 Division 4 of proposed Part 7.8 contains special provisions relating to contracts of insurance. These provisions will carry across the effect of the current section 14 of the IABA in which the insurer rather than the insurer bears the risk of funds held by an insurance broker.

13.25 Proposed section 985B provides that the payment of funds by an insured to a financial services licensee who is not an insurer will constitute a discharge of the liability of the insured to the insurer. However payment of funds by an insurer to a licensee of money payable to an insured will not discharge the liability of the insurer to the insured.

13.26 Proposed section 985C will enable regulations to be made governing the duties of insurance brokers in relation to insurance premiums. These regulations will enable the effect of the current section 27 of the IABA to be carried across to the new regime.

Reporting to clients where money or property is held

13.27 Division 5 of proposed Part 7.8 of the Bill deals with the obligation of financial services licensees to provide periodic statements to clients in relation to loan money or where funds or other property is held on behalf of clients:

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proposed section 986A will enable regulations to be made that impose additional general reporting requirements on licensees in relation to client funds, loan money or other property;

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proposed section 986B will enable regulations to be made dealing with reporting in relation to dealings in derivatives by financial services licensees on behalf of other people;

Financial records, statements and audit

13.28 Division 6 of proposed Part 7.8 applies to financial services businesses carried on by financial services licensees (proposed subsection 987A(1)). The obligations imposed on corporate licensees by Division 6 are in addition to those imposed on companies by Chapter 2M of the proposed Corporations Act (proposed subsection 987A(2)).

13.29 Proposed subsection 987B(1) enables ASIC to exempt particular APRA regulated bodies from the requirements of Division 6, or to declare that Division 6 applies to particular bodies as if specified provisions were omitted, modified or varied as specified in the declaration. Exemptions may be unconditional or be subject to specified conditions. Bodies to which conditional exemptions apply must comply with relevant conditions. A court may order the body to comply with relevant conditions. However only ASIC may apply to the court for such an order (proposed subsection 987B(2)).

Financial records of financial services licensees

13.30 Each financial services licensee will be required to keep financial records that correctly record and explain the transactions and financial position of their financial services business (proposed section 988A).

13.31 The financial records of financial services licensees must also comply with the following requirements (based on sections 856 and 1213 of the existing Corporations Law):

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records must allow profit and loss statements and a balance sheet to be prepared and audited (proposed section 988B);

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records must be kept in the English language or in a manner that enables them to be readily converted into the English language (proposed section 988C);

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records must be sufficiently accessible within this jurisdiction (proposed section 988D); and

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records must be sufficiently detailed to show the particulars of all money received or paid by the licensee, all acquisitions and disposals of financial products made by the licensee, all income received and expenses paid by the licensee, all assets and liabilities of the licensee, all securities or managed investment products that are the property of the licensee or for which the licensee is accountable, and other such matters as are prescribed (proposed section 988E).

13.32 Proposed section 988F will enable regulations to be made that impose additional requirements in relation to the financial records of financial services licensees.

Financial statements of financial services licensees

13.33 Financial services licensees will be required to prepare profit and loss statements and balance sheets in respect of each financial year. This requirement is based on sections 860 and 1218 of the existing Corporations Law.

13.34 Licensees will be required to lodge profit and loss statements and balance sheets with ASIC (proposed section 989B). Proposed section 989C will enable regulations to specify requirements relating to the contents of profit and loss statements and balance sheets as well as applicable accounting standards (proposed section 989C).

13.35 Profit and loss statements and balance sheets will have to be lodged within two months after the end of the financial year (if the licensee is not a body corporate) or within three months after the end of the financial year (if the licensee is a body corporate). ASIC will be empowered to approve an extension of the deadline for lodging profit and loss statements and balance sheets on application of a financial services licensee and the licensees auditor. Extensions may be granted subject to such conditions as ASIC imposes. Licensees must comply with any conditions that are imposed by ASIC (proposed section 989D).

Appointment of auditors

13.36 Provisions governing the appointment of auditors are set out in proposed subsections 990A to 990L. These provisions are based on sections 857 to 859, 861 and 863 as well as sections 1215 to 1217, 1219, 1220 and 1222 of the existing Corporations Law.

Other rules about conduct

Prohibition on unconscionable conduct

13.37 Proposed section 991A will prohibit a financial service licensee from engaging in unconscionable conduct in relation to the provision of a financial service. A person that suffers loss or damage as a consequence of such conduct will be able to recover the amount of the loss or damage through action against the licensee. It will be possible to begin such an action at any time within six years after the day on which the cause of the action arises.

Financial services licensee to give priority to clients orders

13.38 As a general rule, financial services licensees will be required to give priority to client orders. This requirement is based on sections 844 and 1266 of the existing Corporations Law. These provisions have been integrated and extended so that they will apply to all financial products that are able to be traded on a financial market (proposed section 991B).

13.39 Proposed section 991C will enable regulations to be made that impose requirements on financial service licensees in relation to instructions to deal through licensed markets. These requirements may cover the sequence in which transactions are transmitted to a licensed market or another licensee who is a participant in a licensed market and the order in which dealings that have been effected on a licensed market are to be allocated to instructions. Proposed section 991C will also allow regulations to be made that prohibit the disclosure of instructions in specified circumstances. These regulations will carry over the effect of subsection 1266(4) of the existing Corporations Law, which relates to futures contracts.

13.40 Proposed section 991D will enable regulations to be made that impose requirements for the keeping of records relating to instructions received by financial services licensees to deal in financial products through licensed markets (whether inside or outside Australia) as well as the execution and transmission of such instructions. These regulations will carry over the effect of subsections 1266(7) and 1266(8) of the existing Corporations Law, which relate to futures contracts.

Own account dealings by licensees

13.41 As a general rule, proposed subsection 991E(1) will prohibit a financial services licensee (either personally or through an authorised representative) from knowingly entering into a financial product transaction on their own behalf that relates to a financial product that is able to be traded on a licensed market and that is with a person who is not a financial services licensee or an authorised representative (non-licensee). These transactions will only be permitted where the licensee has disclosed to the non-licensee that they will be acting on their own behalf and the non-licensee has consented to the transaction. If the licensee is acting through an authorised representative, the required disclosure must be provided by the representative.

13.42 Proposed subsection 991E(2) will permit regulations to specify how disclosure is to be made in these circumstances by the licensee or their representative and how consent is to be given by the non-licensee.

13.43 A financial services licensee that enters into an own account transaction may not charge the non-licensee brokerage, commission or a fee in respect of the transaction except as permitted by the regulations (proposed subsection 991E(3)).

13.44 The non-licensee may rescind a contract affecting a transaction where requirements relating to disclosure, consent and charging of fees have been contravened. This right will apply unless the relevant contract was for the purchase of financial products by the non-licensee and the non-licensee has subsequently disposed of the products. The right will be exercisable by providing a notice in writing to the licensee during the period of 14 days starting on either the date on which the contract was entered into or any later day specified in the regulations (proposed subsections 991E(4) and 991E(5)).

13.45 Proposed subsection 991E(7) will permit regulations to be made requiring records to be kept by licensees in respect of own account dealings.

Dealings involving employees of financial services licensees

13.46 Proposed section 991F carries over the effect of sections 845 and 1267 of the existing Corporations Law in relation to all financial products. Except as provided by the regulations, a financial services licensee will not be permitted to:

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jointly acquire a financial product with an employee; or

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give credit to an employee or a person they know is an associate of an employee if the credit is given for the purpose of enabling the person to acquire a financial product or if the person giving the credit knows or reasonably believes that the credit will be used for the purposes of acquiring a financial product.

13.47 Except as provided by the regulations, a person who is employed by a financial services licensee that is a participant in a licensed market and is employed in connection with the business of dealing in financial products must not acquire or agree to acquire financial products that are able to be traded on that market on their own behalf unless the licensee acts as the agent of the person in respect of the transaction.

Miscellaneous provisions

13.48 Proposed section 992A contains a general prohibition against the hawking of certain financial products. This prohibition will not apply to the offering of securities as these will be covered by the specific prohibition against securities hawking contained in section 736 of the proposed Corporations Act.

Enforcement

13.49 Most offences against provisions in Part 7.8 will be created through the operation of subsection 1311(1) of the proposed Corporations Act. Where offences are created in this manner, this is indicated by a note at the end of the provision that contains the rule.

Offences related to payment of money into accounts

13.50 Offences relating to contraventions of proposed subsections 981B(1), 982B(1) and proposed section 981C are contained in proposed Division 9 of Part 7.8. These provisions concern the payment of a clients money into certain accounts.

13.51 For each of these provisions, there is both an ordinary offence which uses the default Criminal Code fault elements and a strict liability offence. It is intended that prosecutions for serious contraventions of these provisions will be brought under the ordinary offence.

13.52 However, as these offences contain a range of technical requirements including strict deadlines within which the money must be paid into the relevant account, a strict liability offence has been provided (with an appropriately lower penalty) to facilitate prosecutions for more minor contraventions of the provisions. This reflects the importance of the obligation on people to deal with a clients money in the specified manner.