House of Representatives

Explanatory Memorandum

Circulated By the Authority of the Minister for Human Services Minister for Financial Services, Superannuation and Corporate Law the Hon Chris Bowen Mp

Chapter 2 - Regulation of trustee companies

Outline of chapter

2.1 Schedule 2 to the Corporations Legislation Amendment (Financial Services Modernisation) Bill 2009 (Bill) inserts Chapter 5D (Licensed trustee companies) into the Corporations Act 2001 (Corporations Act). Chapter 5D implements the transfer of trustee company regulation from the States and Territories to the Commonwealth.

2.2 Chapter 5D creates a national licensing regime for trustee companies, thereby reducing the regulatory burden on those companies and creating a national market for trustee services, thus delivering competition benefits to the industry. Chapter 5D also protects consumers by establishing a national consumer protection and disclosure regime under the Corporations Act and the Australian Securities and Investments Commission Act 2001 (ASIC Act).

Context of amendments

2.3 In July 2008, the Council of Australian Governments (COAG) agreed that the Commonwealth would assume responsibility for the regulation of trustee companies. In October 2008, COAG agreed that legislation giving effect to Commonwealth regulation of trustee companies would be introduced in the first half of 2009.

2.4 The private trustee company industry is relatively small with ten licensed private trustee companies. The majority of these trustee companies are licensed and operate in multiple jurisdictions. There are also eight public trust offices.

2.5 Trustee companies have been regulated at an entity level under State and Territory regulatory regimes. The State and Territory laws also allow private trustee companies to enter the market for personal trustee and estate administration work (for example, acting as an executor or administrator of a deceased estate), thereby removing the limitation that these duties could only be undertaken by natural persons. In addition, State and Territory laws facilitate the establishment of long term and perpetual trusts, such as charitable trusts.

2.6 As the majority of trustee companies operate in multiple jurisdictions, the need to obtain a licence in each individual State and Territory, combined with the lack of consistency in licensing requirements, creates barriers to entry and restricts competition in the marketplace.

2.7 It is important to note that the Schedule regulates the provision of the so-called 'traditional trustee company services' of trustee companies. These services are listed in section 601RAC. Where trustee companies provide other services, such as acting as a superannuation trustee, acting as a Responsible Entity for managed funds, providing a custodial or depository service, or acting as a trustee for debenture holders, they must comply with Commonwealth legislation, such as the Superannuation Industry (Supervision) Act 1993 and Chapter 7 of the Corporations Act.

2.8 In order to offer funds management services, all of the private trustee companies hold Australian financial services licence (AFSLs). As a result, they are familiar with regulation by the Australian Securities and Investments Commission (ASIC) and the requirements of an AFSL.

2.9 Broadly, the policy intent is that the Commonwealth will have exclusive responsibility for 'entity level' regulation of trustee companies' traditional services, including licensing those companies and regulating the fees they can charge for those traditional services. At the same time, State and Territory legislation, and the rules of common law and equity, will continue to govern the functions and powers of trustee companies. Also, it is intended to preserve rules which apply generally to persons such as trustees, executors, administrators and guardians (including trustee companies when they perform those roles).

2.10 In the place of the differing State and Territory regimes, Schedule 2 creates a single licensing and reporting regime administered by a single regulator (ASIC). Trustee companies which provide 'traditional trustee company services' will be required to hold an AFSL covering the provision of those services. Further, trustee companies will be subject to the disclosure, conduct, advice and dispute resolution arrangements under the Corporations Act, as modified where necessary by regulations made under the Corporations Regulations 2001 (regulations).

2.11 Also, this legislation introduces a single regime for the disclosure and regulation of fees charged by trustee companies. Most jurisdictions have set caps on the level of fees, but these are not uniform. Two jurisdictions (Western Australia and the Australian Capital Territory) do not cap fees.

2.12 Concerns have also been expressed about the need for more cost effective and timely alternative dispute resolution mechanisms for beneficiaries to enhance the protection available for trust assets. Currently, in the absence of internal dispute resolution services voluntarily provided by the trustee company, the Supreme Court is the only avenue of recourse for beneficiaries with concerns about the management of the trust or estate.

2.13 The legislative power to make this Commonwealth law is primarily derived from section 51(xx) of the Constitution, which empowers the Commonwealth to make laws with respect to 'foreign corporations, and trading or financial corporations formed within the limits of the Commonwealth'. The Commonwealth is relying on its legislative powers, rather than seeking a referral of power from the States.

Summary of new law

2.14 The Bill sets out:

•

when trustee companies are regulated by Chapter 5D, including key concepts such as licensed trustee company, client of a trustee company and traditional trustee company services, and services that are regulated (Part 5D.1);

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the effect of the Bill on the jurisdiction of courts and the continuing operation of State and Territory laws (Part 5D.2, Division 1)

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the powers and obligations of licensed trustee companies, in relation to the provision of accounts and the establishment and operation of common funds (Part 5D.2, Divisions 2 and 3);

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the regulation of fees charged by licensed trustee companies (including fee disclosure) (Part 5D.3);

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the duties of officers and employees of licensed trustee companies (Part 5D.4);

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a 15 per cent voting power limit on control of licensed trustee companies (Part 5D.5);

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the consequences of cancelling a licensed trustee company's AFSL (Part 5D.6); and

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exemptions and modifications by ASIC, and by regulations (Part 5D.7).

Comparison of key features of new law and current law

Detailed explanation of new law

2.15 These provisions bring trustee companies (when they perform traditional trustee company services) into the consumer protection regime for financial services set out in Chapter 7 of the Corporations Act and in the ASIC Act. This means that, subject to modifications, trustee companies must comply with the licensing, conduct, disclosure, advice dispute resolution and compensation requirements of Chapter 7.

Jurisdictional scope

2.16 Chapter 5C is subject to the general territorial application of the Corporations Act - that is, it applies 'in this jurisdiction' (subsection 5(3)). Following the definition of this jurisdiction in subsection 5(1), Chapter 5C applies throughout mainland Australia.

Part 5D.1 - Preliminary

Key concepts and definitions

Regulation of trustee companies

2.17 The regulation of trustee companies under Chapter 5D applies to a 'licensed trustee company'.

2.18 A trustee company is a company:

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that is a constitutional corporation [Schedule 2, item 9, paragraph 601RAB(1)(a)]; and

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that is prescribed by the regulations as a trustee company for the purposes of the Act [Schedule 2, item 9, paragraph 601RAB(1)(b)].

2.19 Companies may (for example) be prescribed:

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by setting out a list of companies in the regulations [Schedule 2, item 9, paragraph 601RAB(2(a)]; or

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by providing a mechanism in the regulation for the determination of a list of companies [Schedule 2, item 9, paragraph 601RAB(2)(b)].

Example 2.1

For example, the regulations could specify that a corporation that is authorised to apply for a grant of probate or letters of administration, of the estate of a deceased person, must be listed.

2.20 A licensed trustee company is a trustee company that holds an AFSL covering the provision of 'traditional trustee company services' . [Schedule 2, item 9, section 601RAA]

2.21 As traditional trustee company services are financial services for the purpose of Chapter 7 (see proposed subsection 766A(1A) at Schedule 2, item 19), a trustee company will be required to hold an AFSL to provide those services.

Services covered by this chapter

2.22 The regulation of licensed trustee companies only applies to traditional trustee company services. Traditional trustee company services fall into two categories:

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preparing certain documents (such as a will or trust instrument), applying for certain authorisations (such as probate), and establishing and operating a common fund [Schedule 2, item 9, subsection 601RAC(1)]; and

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estate management functions, which involve acting in certain formal roles, such as a trustee, executor, attorney, guardian or receiver [Schedule 2, item 9, subsection 601RAC(2)].

2.23 The overall effect is that a trustee company must be listed as a trustee company, and must hold an AFSL granted by ASIC, with that AFSL covering the provision of 'traditional trustee company services'.

2.24 The Chapter applies to all trustee companies that are listed in the Schedule and that hold an AFSL covering the provision of traditional trustee company services. This is subject to the proviso that public trust offices are only covered by the Chapter if they (and the relevant State/Territory) explicitly opt to be covered.

Services that are not covered by this chapter

2.25 Trustee companies provide a wide range of services, including services that are not covered by the definition of 'traditional trustee company services'. To ensure there is no overlap and such services are not covered by Chapter 5C, the Chapter does not apply to:

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operating a registered scheme (under Chapter 5C);

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providing a custodial or depository service (within the meaning of section 766E);

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acting as trustee for debenture holders under Chapter 2L;

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acting as a receiver or other controller of property of a corporation under Part 5.2;

•

acting as trustee of a superannuation fund, an approved deposit fund or a pooled superannuation trust (within the meaning of the Superannuation Industry (Supervision) Act 1993); or

•

acting in any other capacity prescribed by the regulations.

[Schedule 2, item 9, subsection 601RAC(3]

Meaning of ' client'

2.26 A client of a trustee company is a person to whom, within the meaning of Chapter 7 of the Corporations Act, a financial service (that is, a traditional trustee company service) is provided by the trustee company. Regulations made for the purpose of subsection 766A(1B) may define who is a client of a trustee company . [Schedule 2, item 9, section 601RAA and subsection 601RAB(3)]

Meaning of ' court' and ' Court'

2.27 These terms are defined in existing section 58AA of the Corporations Act. While court means any court , Court relevantly includes the Federal Court and the Supreme Court of a State or Territory. It is envisaged that the State and Territory Supreme Courts would continue to exercise their traditional functions, albeit (where such functions are covered by the Schedule) as an exercise of Federal jurisdiction by a State court.

Meaning of ' person with a proper interest'

2.28 The concept of a person with a proper interest, in relation to an estate, is defined in section 601RAD as including a number of persons and entities, both generally and in the case of charitable trusts, other trusts and deceased estates . [Schedule 2, item 9, section 601RAD]

Other key definitions

2.29 Fees are defined broadly to include fees in the nature of remuneration (including commissions), to ensure the definition accords with other references to fees in the Corporations Act (for example, in paragraph 942B(2)(e)) . [Schedule 2, item 9, section 601RAA]

2.30 A law means a law of the Commonwealth or of a State or Territory, and includes a rule of common law or equity. This definition mainly affects breach notification requirements . [Schedule 2, item 9, section 601RAA]

2.31 The term publish picks up any references in regulations to publishing requirements . [Schedule 2, item 9, section 601RAA]

2.32 A will includes a codicil and other testamentary writing . [Schedule 2, item 9, section 601RAA]

2.33 The term estate is not defined in the legislation, but takes its meaning from section 22 of the Acts Interpretation Act 1901 as including 'any estate or interest charge right title claim demand lien or incumbrance at law or in equity'.

Interaction between trustee company provisions and State and Territory laws

2.34 A major objective of this reform is to ensure that, as far as possible, trustee companies are not subjected to multiple or overlapping regulatory regimes.

2.35 Section 601RAE sets out the areas of law in which the trustee company provisions (as defined in subsection (1)) are intended to operate exclusively. They are laws that:

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authorise or license companies to provide traditional trustee company services generally (as opposed to laws that authorise or license companies to provide a particular traditional trustee company service);

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regulate the fees that may be charged by companies for the provision of traditional trustee company services, and laws that require the disclosure of such fees;

•

deal with the provision of accounts by companies in relation to traditional trustee company services that they provide;

•

deal with the duties of officers or employees of companies that provide traditional trustee company services;

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regulate the voting power that people may hold in companies that provide traditional trustee company services, or that otherwise impose restrictions on the ownership or control of companies that provide traditional trustee company services;

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deal with what happens to assets and liabilities held by a company, in connection with the provision by the company of traditional trustee company services, if the company ceases to be licensed or authorised to provide such services. (This does not apply to laws referred to in section 601WBC, that is, complementary State and Territory legislation to give effect to transfers of estate assets and liabilities.)

[Schedule 2, item 9, subsection 601RAE(2)]

2.36 The section explicitly notes that the Commonwealth provisions are not intended to exclude State or Territory laws that require a company, or its staff, to have particular qualifications or experience. The section also explicitly states that complementary State or Territory statutes giving effect to compulsory transfer determinations under Part 5D.6 are not excluded . [Schedule 2, item 9, subsection 601RAE(3)]

2.37 There is a specific regulation-making power to provide that the trustee company provisions are, or are not, intended to exclude prescribed State or Territory laws . [Schedule 2, item 9, subsection 601RAE(4)]

2.38 Part 1.1A, which ordinarily sets out the relationship between the Corporations Act and State and Territory legislation, does not apply in relation to the trustee company provisions . [Schedule 2, item 9, subsection 601RAE(6)]

Part 5D.2 - Powers etc. of licensed trustee companies

2.39 Part 5D.2 broadly deals with two matters. First, it deals with the effect of Schedule 2 on the jurisdiction of courts and the continuing operation of State and Territory laws [Schedule 2, item 9, Part 5D.2, Division 1]. Secondly, it sets out the powers and obligations of licensed trustee companies in relation to the provision of accounts and the establishment and operation of common funds . [Schedule 2, item 9, Part 5D.2, Divisions 2 and 3]

2.40 In the past, only natural persons were able to provide personal trustee and estate administration services. While this obstacle has been removed by State and Territory laws, it should also be noted that, under subsection 124(1) of the Corporations Act, a company has the legal capacity and powers of an individual both in and outside this jurisdiction.

Division 1 - General provisions

2.41 Part 5D.2 does not affect the inherent power or jurisdiction of courts to supervise the performance of traditional trustee company functions. A licensed trustee company is subject in all respects to the same control and general jurisdiction of courts in the same way as any other person who performs traditional trustee company functions. Under subsection 58AA(1) of the Corporations Act , court means any court . [Schedule 2, item 9, section 601SAA]

2.42 In addition to the powers, functions, liabilities and obligations, and such privileges and immunities, which a licensed trustee company has under these provisions, the company also has such other powers etc. as are prescribed by the regulations . [Schedule 2, item 9, section 601SAB]

2.43 The functions, powers, liabilities and obligations, and the privileges and immunities, conferred or imposed, on licensed trustee companies by this Part are in addition to, any functions and powers, under any other law (law is defined in section 601RA to mean Commonwealth, State or Territory laws or a rule of common law or equity). This provision is intended to permit the concurrent operation of State and Territory laws that confer powers on trustees, executors, guardians etc . [Schedule 2, item 9, section 601SAC]

Division 2 - Accounts

2.44 These provisions specify circumstances in which:

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a licensed trustee company is not required to file accounts relating to an estate, or may be required to provide an account in relation to an estate; and

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the Court may order an audit of an estate, and requirements to make documents available.

Licensed trustee company not required to file accounts

2.45 A licensed trustee company, when acting alone in relation to any estate of a deceased person, is not required to file, or file and pass, accounts relating to the estate unless ordered to do so by the Court. While Court is defined in subsection 58AA(1), it is envisaged that the State and Territory Supreme Courts would continue to exercise this role. A licensed trustee company acting jointly with another person also does not have to file, or file and pass, account relating to the estate unless the other person intends to charge fees for its role, or so ordered by the Court . [Schedule 2, item 9, section 601SBA]

Licensed trustee company may be required to provide account in relation to estate

2.46 To ensure that persons with a proper interest in the estate (as defined in section 601RAD) are able to access relevant information about the management of the estate, licensed trustee companies need to account to those persons on request.

2.47 On application by a person with a proper interest in an estate that is being administered or managed by the licensed trustee company, the company must provide that person with an account of:

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the assets and liabilities of the estate;

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the trustee company's administration or management of the estate;

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any investment made from the estate;

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any distribution made from the estate; and

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any other expenditure (including fees and commissions) from the estate.

[Schedule 2, item 9, subsection 601SBB(1)]

2.48 Failure to provide the account is an offence. The maximum penalty is 50 penalty units. ('Penalty unit' is defined in subsection 4AA(1) of the Crimes Act 1914.) A penalty has been imposed because it is essential that a person with a proper interest is provided with the information contained in properly prepared accounts, so that the person may make an informed assessment about the management of the estate . [Schedule 2, item 28, item 173A in the table]

2.49 If a company has provided an account, and a further account is requested within three months, the company need not provide a further account until that period of three months has expired. A defendant trustee company bears an evidential burden in relation to whether an account has been provided within the three month period, as this is a matter within the knowledge of the company . [Schedule 2, item 9, subsection 601SBB(2)]

2.50 The company may charge a reasonable fee for providing the account under this section . [Schedule 2, item 9, subsection 601SBB(3)]

2.51 If the company fails to account, the Court may, on application by the person, make any order that the Court considers appropriate, including an order requiring the preparation and delivery of proper accounts . [Schedule 2, item 9, subsection 601SBB(4)]

Court may order audit

2.52 This provision enables the Court, on any application under section 601SBB, to order an examination of the accounts of the trustee company relating to the estate by the person named in the order . [Schedule 2, item 9, subsection 601SBC(1)]

2.53 On the making of an order, the trustee company must provide the person with:

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a list of all the accounts kept by the company relating to the estate; and

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at all reasonable times, all books (as defined in section 9 of the Corporations Act) in the company's possession relating to the estate; and

•

all necessary information and all other necessary facilities for enabling the person to make the examination.

[Schedule 2, item 9, subsection 601SBC(2)]

2.54 Failure to comply with subsection 601SBC(2) is an offence. The maximum penalty is 50 penalty units. A penalty has been imposed because it is essential that a trustee company comply with a court ordered audit . [Schedule 2, item 28, item 173B in the table]

Division 3 - Common funds

2.55 Division 3 of Part 5D.2 overcomes the rules of trust law that would otherwise prevent the pooling of trust money with other money, or the pooling of money from two or more trusts.

2.56 Trustee companies are permitted to operate common funds to enable the efficient pooling and investment of moneys from different estates. A common fund is a fund that contains money from two or more estates . [Schedule 2, item 9, subsections 601SCA(1) and (2)]

2.57 A common fund can only be established and operated if it contains at least some estate money. If this condition is satisfied, the common fund may also include other money . [Schedule 2, item 9, subsections 601SCA(1) and (3)]

2.58 If investments in common funds are offered to the public, trustee companies must also comply with the managed investment scheme provisions in Chapter 5C of the Corporations Act. These provisions require managed investment schemes to be managed by a responsible entity, which must be a public corporation and hold a dealer's licence. Each scheme must have a constitution, a compliance plan and a registered prospectus.

Obligations relating to common funds

2.59 If a licensed trustee company creates more than one common fund, each common fund must be allocated an appropriate distinguishing number. Failure to do so is an offence, to ensure that persons with a proper interest in an estate can ascertain in which common fund the funds of the estate have been placed. The maximum penalty is 50 penalty units. [Schedule 2, item 9, subsection 601SCB(1); item 28, item 173C in the table]

2.60 The trustee company must keep, for each common fund, accounts showing at all times the current amount for the time being at credit in the fund on the account of each estate. Failure to do so is an offence, to ensure that persons with a proper interest in an estate can ascertain how much money stands to the credit of the estate at any time. The maximum penalty is 50 penalty units. [Schedule 2, item 9, subsection 601SCB(2); item 28, item 173D in the table]

2.61 Estate money cannot be pooled into a common fund if it would be contrary to an express provision of the conditions under which the estate money is held. Failure to comply is an offence, to ensure that the wishes of the person who created the estate are respected. The maximum penalty is 60 penalty units or imprisonment for 12 months, or both. [Schedule 2, item 9, subsection 601SCB(3)]; item 28, item 173E in the table]

Regulations relating to establishment or operation of common funds

2.62 The regulations may include provisions relating to the establishment or operation of common funds. The reason for this broad power is to (for example) enable standards to be set . [Schedule 2, item 9, section 601SCC]

2.63 Regulations made under section 601SCC may alter the effect of section 601SCA, for example, the regulations may limit the circumstances in which other money may be pooled together with estate money . [Schedule 2, item 9, subsection 601SCA(4)]

Part 5D.3 - Regulation of fees charged by licensed trustee companies

2.64 Part 5D.3 of the Schedule regulates the disclosure of fees, and the level of fees, that licensed trustee companies are able to charge their clients for traditional trustee company services.

2.65 The regulation of fees only applies to 'traditional trustee company services'. 'Traditional trustee company services' are defined in section 601RAC. This means that the regulation of fees that occurs under this Part does not apply to fees for any other service that a trustee company may provide, such as acting as a superannuation trustee or being the responsible entity of a managed fund.

2.66 The general approach to the regulation of fees includes:

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disclosure of fees for all work which may be performed (fees include remuneration/commissions);

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deregulation of the fees charged to new trusts and estates (other than charitable trusts), subject to a requirement that the company's fee schedule be disclosed on the Internet and a requirement that trustee companies charge no more than the fees specified in their published fee schedule immediately before the trustee company started to provide the service;

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in relation to charitable trusts:

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'grandfathering' of fees charged to existing clients ('grandfathering' means that those existing clients will continue to pay the same fees as they did before the new legislation); and

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capping of fees charged to new clients.

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The Government is committed to a review of the fee arrangements in relation to charitable trusts after two years of operation.

Division 1 - Disclosure of fees charged to estates and trusts

2.67 Division 1 of Part 5D.3 deals with the disclosure of fees.

Disclosure of fees to the public

2.68 A licensed trustee company must ensure that an up-to-date schedule of its fees that are generally charged for its services (only traditional trustee company services) is:

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published on a website maintained by or on behalf of the company; and

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is available free of charge at the trustee company's offices during usual opening hours.

[Schedule 2, item 9, section 601TAA]

2.69 This measure supports the public disclosure of fees which may assist in enhancing transparency of fees and competition among trustee companies. It also provides a measure by which fees are fixed for the duration of the service under section 601TCA. For these reasons, failure to comply is an offence, and the maximum penalty is 60 penalty units or imprisonment for 12 months, or both . [Schedule 2, item 28, item 173F in the table]

Provision of Financial Services Guide

2.70 As part of the requirement for a trustee company to hold an AFSL, licensed trustee companies (and its authorised representatives) must comply with the obligations that attach to the AFSL, including certain disclosure obligations contained in Part 7.7 of the Corporations Act, as modified by regulation, as appropriate. (Under the transitional provisions, this provision does not apply until six months after commencement.) [Schedule 1, item 14, subsection 766A(1A) and (1B)]

2.71 The Schedule amends section 761G to provide that traditional trustee company services are provided to a person as a retail client, subject to a regulation making power primarily designed to deal with unintended consequences and/or obligations that are not relevant to traditional trustee company services . [Schedule 2, items 15 and 16, subsection 761G(6A)]

2.72 Among other obligations, this will mean that a licensed trustee company (or authorised representative) is required to provide a financial services guide (FSG) to its client at the time when the client is seeking to acquire a service (for example, the drafting of a will). This means the client will receive information about the fees in the nature of remuneration (including commissions) that the trustee company charges for traditional trustee company services, as well as other information about the trustee company as set out in subsections 942B(2) and 942C(2). Under section 941D, this disclosure must occur as soon as practicable after it becomes apparent to the trustee company that they will, or are likely, to provide services to the client.

Disclosure to clients of changed fees

2.73 If a licensed trustee company continues to provide traditional trustee company services to a client and the fees that it will charge change, the company must within 21 days of the change in fees taking effect notify the client of the change. The company may:

•

send the client a copy of the changed fee, if the client has made an election under paragraph 601TAB(2) [Schedule 2, item 9, paragraph 601TAB(1)(a)]; or

•

in any other case - directly notify the client, in writing, that the changed fees are available on a website maintained by or on behalf of the company [Schedule 2, item 9, paragraph 601TAB(1)(b)].

2.74 Failure to comply with subsection 601TAB(1) is an offence, to ensure trustee companies provide updated fee schedules to their clients who are affected. The maximum penalty is 60 penalty units or imprisonment for 12 months, or both . [Schedule 2, item 28, item 173G in the table]

2.75 If a client has elected to receive a copy of changes to fees (which is free of charge) they can elect to receive an electronic copy. In any other case, the client must be provided with a hard copy . [Schedule 2, item 9, paragraphs 601TAB(2)(a) and (b)]

2.76 If the client is under a legal disability, a copy of the changed fees, or a notice regarding changed fees, must be provided to the client's agent ('agent' is sufficiently broad to encompass a person's legal representative), and a request referred to in paragraph 601TAB(1)(a) or (2)(a) may be made by the agent.

Division 2 - General arrangements about charging fees

2.77 Division 2 of Part 5D.3 clarifies some matters in relation to arrangements for fees charged to trusts and estates.

Power to charge fees

2.78 This section makes it clear that, notwithstanding any impediment at common law (or in a statute), a licensed trustee company may charge fees for the provision of traditional trustee company services. The power to charge fees is subject to Part 5D.3 . [Schedule 2, item 9, subsection 601TBA(1)]

2.79 The section also makes clear that if a provision of Part 5D.3 limits the fees that a trustee company may charge, the trustee company must not charge fees in excess of that limit. Failure to comply with this section is an offence. The maximum penalty is 60 penalty units or imprisonment for 12 months, or both. A penalty has been imposed to ensure that trustee companies adhere to the fee limits. Also, excess fees may be recovered in a civil action under section 601XAA. [Schedule 2, item 9, subsection 601TBA(2); item 28, item 173H in the table and section 601XAA]

2.80 As Division 4 and 5 of this Part place some limits on fees that may be charged, the Schedule clarifies that this Part does not prevent agreements between the parties as to the fees that are charged, either in addition to, or instead of the fees, that are permitted by this Part. This can be a result of:

•

any fees that a testator, in his or her will, has directed to be paid [Schedule 2, item 9, subsection 601TBB(1)]; or

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any fees that are agreed between the trustee company and a person or persons who have authority to deal with the trustee company on matters relating to the provision of the service (such persons may be prescribed by regulation) [Schedule 2, item 9, subsection 601TBB(2)].

2.81 The legislation clarifies that the Part does not prevent a licensed trustee company from charging a fee permitted by subsection 601SBB(3) for the provision of an account in relation to an estate . [Schedule 2, item 9, section 601TBC]

2.82 The legislation also clarifies that the Part does not prevent the reimbursement of all disbursements properly made by the trustee company in the provision of traditional trustee company services . [Schedule 2, item 9, section 601TBD].

2.83 Finally, where a licensed trustee company provides estate management services, fees charged for the provision of this service must be paid out of the capital or income of the relevant estate. This provision provides flexibility for the licensed trustee company to draw fees from capital or income of the estate, as appropriate . [Schedule 2, item 9, subsection 601TBE(2)]

2.84 This flexibility does not apply to:

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a management fee (under section 601TDD), which can only come out of income of the relevant estate. This management fee only applies to new charitable trusts; and

•

a common fund administration fee (under section 601TDE or 601TDI), which can only come out of the income received by the common fund. This common fund administration fee only applies to new charitable trusts.

[Schedule 2, item 9, paragraphs 601TBE(3)(a) and (b)]

Division 3 - Fees charged to trusts and estates (other than for being trustee or manager of a charitable trust)

2.85 Division 3 of Part 5D.3 deals with fees charged, other than for charitable trusts.

2.86 A licensed trustee company must not charge fees in excess of its schedule of fees most recently published on its website (required by section 601TAA) before the trustee company started to provide the service. This means that a client cannot be charged more than the fees set out in the schedule of fees for the duration of the service . [Schedule 2, item 9, section 601TCA]

2.87 This fixed fee schedule for the duration of the service provides some certainty to consumers about the level of fees.

2.88 Trustee companies are able to change the schedule of fees as appropriate, reflecting the changing costs of the services, but once the service commences the fees are locked in at the last published schedule of fees.

2.89 As set out earlier, the parties are able to negotiate, either higher or lower fees, than the amount set in the most recent published schedule of fees.

2.90 The fee arrangements (under section 601TCA) do not apply to:

•

the provision of any service that started before commencement of this section; or

•

the service is being the trustee or manager of a charitable trust. Fees for charitable trusts are regulated by Division 4.

Division 4 - Fees for being trustee or manager of a charitable trust

2.91 Division 4 of Part 5D.3 deals with fees in relation to licensed trustee companies providing the service of being the trustee or manager of a charitable trust when the provision of the service started on or after the commencement of section 601TDA . [Schedule 2, section 601TDA]

2.92 Different fee arrangements apply to services provided to new charitable trusts (these being services provided after this section commences), and existing charitable trusts (for services already being provided).

2.93 The Government will review the fees arrangements for both existing and new charitable trusts after the provisions have been in operation for two years.

2.94 The Schedule does not define a 'charitable trust'. The meaning of charitable trust is derived from case law.

Subdivision A - Fees for new charitable trusts

2.95 Subdivision A deals with fee arrangements for new charitable trusts.

2.96 If a licensed trustee company provides traditional trustee company services, being service as the trustee or manager of a charitable trust and that service started on or after the commencement of this section, then, the trustee company must only charge,

•

either:

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a capital commission and an income commission, as provided under section 601TDC (option 1); or

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a management fee as provided under section 601TDD (option 2) [Schedule 2, item 9, paragraph 601TDB(1)(a)]; and

•

if applicable, common fund administration fees under section 601TDE [Schedule 2, item 9, paragraph 601TDB(1)(b)]; and

•

if applicable, fees permitted by section 601TDF in respect of the preparation of returns etc [Schedule 2, item 9, paragraph 601TDB(1)(c)].

2.97 This provision mirrors the arrangements set out in Part IV of the Trustee Companies Act 1984 (Victoria).

2.98 As previously outlined, this fee structure does not affect the ability of the charitable trust and the trustee company to negotiate different fee arrangements.

Option 1: Capital and income commission

2.99 The first option is that a trustee company may charge a capital commission and an income commission . [Schedule 2, item 9, section 601TDC]

2.100 The capital commission charged must not exceed 5.5 per cent (goods and services tax (GST) inclusive) of the gross value of the trust assets. 'Gross value of the trust assets' is undefined. The capital commission can only be charged once during the period the trustee company is trustee or manager of the trust . [Schedule 2, item 9, subsections 601TDC(1) and (2)]

2.101 The regulations may make provision relating to the capital commission, which may include (but are not limited to):

•

the calculation of the commission or the gross value of trust assets;

•

when, during the period referred to in subsection (2), the commission may be charged.

[Schedule 2, item 9, subsection 601TDC(3)]

2.102 In addition to the capital commission, the trustee company may charge an annual income commission not exceeding 6.6 per cent (goods and services tax (GST) inclusive) of the income received on trust assets . [Schedule 2, item 9, subsection 601TDC(4)]

2.103 The regulations may make provision relating to the income commission, which may include (but are not limited to):

•

the calculation of the commission or of the income received on the trust assets;

•

when, during the year, the commission may be charged; and

•

apportionment of the amount of the commission for part-years.

[Schedule 2, item 9, subsection 601TDC(5)]

Option 2: Annual management fee

2.104 The second option is that, instead of a capital commission and income commission, a trustee company may charge an annual management fee. The annual management fee must not exceed 1.056 per cent (GST inclusive) of the gross value of the trust assets. (It is understood that the 1.056 per cent figure is based on a monthly figure of 0.08 per cent plus GST.) [Schedule 2, item 9, subsection 601TDD(1)]

2.105 The regulations may make provision relating to the management fee, including (but not limited to):

•

the calculation of the management fee or of the gross value of the trust assets; and

•

when, during a year, the management fee may be charged; and

•

apportionments of the amount of the management fee for part-years.

[Schedule 2, item 9, subsection 601TDD(2)]

Common funds

2.106 If trust assets are included in a common fund operated by the trustee company, the trustee company may charge an annual common fund administration fee not exceeding 1.1 per cent of the gross value of the trust's assets in the fund . [Schedule 2, item 9, subsection 601TDE(1)]

2.107 The regulations may make provisions relating to common fund administration including (but not limited to):

•

the calculation of the common fund administration fee or gross value of the trust assets in the fund; and

•

when, during a year, the common fund administration fee may be charged; and

•

the apportionment of the common fund administration fee for part-years.

[Schedule 2, item 9, subsection 601TDE(2)]

Additional amounts for preparation of returns etc.

2.108 The trustee company may charge a reasonable fee for work involved in the preparation and lodging of returns for the purpose of, or in connection with, assessments of any duties or taxes (other than probate, death, succession or estate duties) related to the trust estate . [Schedule 2, item 9, section 601TDF]

Subdivision B - Existing client charitable trusts

2.109 Subdivision B of Division 4 deals with fee arrangements for existing client charitable trusts . [Schedule 2, item 9, section 601TDG]

2.110 The Schedule 'grandfathers' fees in relation to existing charitable trust clients. 'Grandfathering' generally means that, when rules change, current participants remain unaffected and the new rules only apply to new participants. 'Grandfathering' will apply where the trustee company provides a traditional trustee company service, being a service as the trustee or manager of a charitable trust and that service started before the commencement of this section.

2.111 In those circumstances, the general rule is that the trustee company must not charge fees in excess of fees that it could have charged in relation to the trust immediately before the commencement of this section . [Schedule 2, item 9, section 601TDH]

2.112 However, if any of the trust assets are included in a common fund, the trustee company may charge an annual administration fee not exceeding 1.1 per cent of the gross value of the charitable trust's assets in the fund. This provision enables trustee companies to charge the additional fee at the estate level, rather than at the common fund level. The regulations may make provision for matters relating to the common fund administration fee . [Schedule 2, item 9, section 601TDI]

2.113 Further, the trustee company may charge a reasonable fee for work involved in the preparation and lodging of returns for the purpose of, or in connection with, assessments of any duties or taxes (other than probate, death, succession or estate duties) related to the trust estate . [Schedule 2, item 9, section 601TDJ]

Division 5 - Miscellaneous

2.114 Division 5 deals with miscellaneous matters, including powers of the court regarding excessive fees and directors' fees payable to an officer of a trustee company who acts as director of (another) corporation for purposes connected with the administration or management of an estate.

Power of the Court with respect to excessive fees

2.115 If the Court is of the opinion that the fees charged by a licensed trustee company are excessive in respect of an estate, the Court may review the fees and may, having reviewed the fees, reduce them . [Schedule 2, item 9, subsection 601TEA(1)]

2.116 The Court may not review fees:

•

that are charged as permitted by section 601TBB (that is, fees set by a testator, or agreed between the trustee company and persons with authority to negotiate; or

•

that relate to a charitable trust and are charged in accordance with Subdivision A of Division 4, given that these fees are fixed by law.

[Schedule 2, item 9, subsection 601TEA(2)]

2.117 When the Court is considering whether fees are excessive, the Court may consider any or all of the matters set out in subsection 601TEA(3). Those matters include: the extent to which work performed by the company was reasonably necessary; the period during which the work was, or is likely to be, performed; the complexity (or otherwise) or the work performed, or likely to be performed, by the company; and the extent to which the trustee company was, or is likely to be, required to deal with extraordinary matters. The Court may also consider any other relevant matter . [Schedule 2, item 9, subsection 601TEA(3)]

2.118 The Court may exercise its powers either on its own motion or on application of a person with a proper interest in the estate (as defined in section 601RAD) . [Schedule 2, item 9, subsection 601TEA(4)]

2.119 If the Court reduces the fees by more than 10 per cent, the company must, unless the Court in special circumstances otherwise orders, pay the costs of the review. Subject to this proviso, all questions of costs of the review are in the discretion of the Court . [Schedule 2, item 9, subsections 601TEA(5) and (6)]

Directors' fees otherwise payable to an officer of a trustee company

2.120 This provision is intended to apply where an estate being administered or managed by a trustee company has a shareholding or other interest in a corporation, and an officer of the trustee company acts as a director of that corporation for the purposes of administering the estate . [Schedule 2, item 9, subsection 601TEB(1)]

2.121 In such circumstances, the trustee company is entitled to the directors' fees payable to the officer. To clarify matters, neither the officer nor the estate is entitled to such fees . [Schedule 2, item 9, subsections 601TEB(2) and (3)]

Part 5D.4 - Duties of officers and employees of licensed trustee companies

2.122 Part 5D.4 sets out the duties of officers and employees of licensed trustee companies.

2.123 It is the intention of the legislation that State and Territory laws providing for personal liability of directors of trustee companies are to be repealed. In their place, the rules provided by this Schedule, and other Corporations Act provisions, such as section 197, will govern directors and officers' duties and liabilities.

Duties of officers

2.124 An officer of a licensed trustee company has duties imposed under section 601UAA. (These duties are in addition to duties owed under other provisions of the Corporations Act, such as section 197.) In the main, the duties can be classified as:

•

duties of loyalty and good faith; and

•

duties of care, skill and diligence.

[Schedule 2, item 9, section 601UAA]

Duties of loyalty and good faith

2.125 The positive duty of loyalty of an officer of a trustee company is to act honestly . [Schedule 2, item 9, paragraph 601UAA(1)(a)]

2.126 The negative aspects of the duty of loyalty require the officers of trustee companies to avoid the following conflicts of interest:

•

not to make use of information to gain an improper advantage for the officer or another person or cause detriment to the clients of the trustee company; and

•

not to make improper use of their position to gain directly or indirectly an advantage for themselves, or for any other person, or cause detriment to the clients of the trustee company.

[Schedule 2, item 9, paragraphs 601UAA(1)(c) and (d)]

Duties of care, skill and diligence

2.127 An officer of a licensed trustee company must:

•

exercise the degree of care and diligence that a reasonable person would expect if they were in the officer's position [Schedule 2, item 9, paragraph 601UAA(1)(b)]; and

•

take all steps to ensure the trustee company complies with the Corporations Act and its AFSL [Schedule 2, item 9, paragraph 601UAA(1)(e)].

2.128 There are both civil and criminal penalties for a contravention of the duties under subsection 601UAA(1). The intention of the dual regime is to give primacy to the civil penalty regime and retain criminal penalties for serious breaches of the Act.

•

Civil penalties apply for a contravention, or involvement in a contravention, of subsection 601UAA(1). This is reflected in subsection 1317E(1), as amended [Schedule 2, item 9, subsections 601UAA(1); item 27, paragraph 1317E(1)(jaaa)].

•

Also it is an offence to intentionally or recklessly contravene (or be involved in a contravention of) subsection 601UAA(1). The maximum penalty is 300 penalty units or imprisonment for five years, or both [Schedule 2, item 9, subsections 601UAA(1) and (2); item 28, item 173J in the table].

2.129 The duties of an officer of a trustee company under subsection 601UAA(1) override any conflicting duties the officer has under Part 2D.1 of the Corporations Act (duties of officers and employees), but is subject any conflicting duties the officer has under Part 5C.2 (duties of officers and employees of responsible entities of managed investment schemes) . [Schedule 2, item 9, subsection 601UAA(3)]

2.130 A reference to a client in this section is a reference to the clients, when viewed as a group (client is defined in subsection 601RAB(3)) . [Schedule 2, item 9, subsection 601UAA(4)]

Duties of employees

2.131 The Schedule imposes a negative duty on employees of trustee companies to avoid conflicts of interest. An employee must not:

•

make use of information to gain an improper advantage for the employee or another person or cause detriment to the clients of the trustee company; or

•

make improper use of their position to gain directly or indirectly an advantage for themselves, or for any other person, or cause detriment to the clients of the trustee company.

[Schedule 2, item 9, subsection 601UAB(1)]

2.132 There are both civil and criminal penalties for a contravention of the duties under subsection 601UAB(1). As with subsection 601UAA(1), the intention of the dual regime is to give primacy to the civil penalty regime and retain criminal penalties for serious breaches of the Act.

•

Civil penalties apply for a contravention, or involvement in a contravention of subsection 601UAB(1). This is reflected in subsection 1317E(1), as amended [Schedule 2, item 9, subsection 601UAB(2); item 27, paragraph 1317E(1)(jaab)].

•

Also, it is an offence to intentionally or recklessly contravene (or be involved in a contravention of) subsection 601UAB(1). The maximum penalty is 300 penalty units or imprisonment for five years, or both [Schedule 2, item 9, subsection 601UAB(1); item 28, item 173K in the table].

2.133 The duties of an employee of a trustee company under subsection 601UAB(1) override any conflicting duty the employee has under Part 2D.1 of the Corporations Act (this relates to duties of officers and employees) but is subject any conflicting duties the employee has under Part 5C.2 (duties of officers and employees of responsible entities of managed investment schemes) . [Schedule 2, item 9, subsection 601UAB(3)]

2.134 A reference to a client in this section is a reference to the clients, when viewed as a group (client is defined in subsection 601RAB(3)) . [Schedule 2, item 9, subsection 601UAB(4)]

Part 5D.5 - Limit on control of licensed trustee companies

2.135 Many State and Territory laws include ownership restrictions for trustee companies. The Schedule also places ownership restrictions on trustee companies. These limitations are intended to maintain a broad spread of ownership and minimise the possibility that a single shareholder could obtain control.

2.136 Part 5D.5 provides for:

•

a prohibition on acquisitions which result in an 'unacceptable control situation'. This has the effect of restricting voting power of any one person (and two or more persons under an arrangement) in a trustee company to 15 per cent, unless the Minister approves a higher shareholding under Division 2 [Schedule 2, item 9, section 601VAA and Division 2 of Part 5D.5];

•

procedures for the Minister to approve a higher shareholding than 15 per cent [Schedule 2, item 9, Division 2 of Part 5D.5];

•

provisions empowering the Court to make a remedial order or issue an injunction where there is an unacceptable control situation [Schedule 2, item 9, sections 601VAC and 601VAD], so long as an order under section 601VAC does not offend paragraph 51(xxxi) of the Constitution relating to unjust acquisition of property [Schedule 2, item 9, section 601VCA]; and

•

an anti-avoidance provision [Schedule 2, item 9, section 601VCC].

2.137 The 15 per cent limitation is comparable to the limitation for 'financial sector companies' under the Financial Sector (Shareholdings) Act 1998. Further, the limitation aligns with Division 1 of Part 7.4 of the Corporations Act on bodies corporate and their holding companies, who hold an Australian market licence or Australian clearing and settlement facility licence.

Unacceptable control situation - the 15 per cent limitation

2.138 An unacceptable control situation exists if a person's voting power in relation to a licensed trustee company exceeds 15 per cent, or exceeds the set percentage in force under Division 2 in relation to that trustee company . [Schedule 2, item 9, section 601VAA]

2.139 It is an offence for a person (or two or more persons) to acquire shares in a body corporate, where the acquisition has the result that:

•

an unacceptable control situation comes into existence in relation to the trustee company; or

•

if an unacceptable control situation already exists in relation to the trustee company - there is an increase in the voting power of the person in the trustee company.

[Schedule 2, item 9, section 601VAB]

2.140 Contravention of section 601VAB is an offence, in order to emphasise the seriousness of a breach of the shareholding limit. The maximum penalty is 120 penalty units or imprisonment for two years, or both . [Schedule 2, item 28, item 173L in the table]

Division 2 - Approval to exceed 15 per cent limitation

2.141 Division 2 empowers the Minister to approve applications to hold more than 15 per cent of the voting power of a licensed trustee company if the Minister is satisfied that it would be in the interests of the licensed trustee company and its clients. This power to increase the 15 per cent ownership limitation is included so that, for example, the range of ownership options in the future is not fettered. For example many trustee companies are wholly-owned subsidiaries of other companies.

2.142 The provisions cover the following:

•

lodging an application with ASIC to exceed the 15 per cent limitation [Schedule 2, item 9, section 601VBA];

•

the Minister granting or refusing such an application [Schedule 2, item 9, section 601VBB] and revoking an approval [Schedule 2, item 9, section 601VBF];

•

the duration of the approval [Schedule 2, item 9, section 601VBC];

•

conditions of approval [Schedule 2, item 9, section 601VBD];

•

varying the percentage approved [Schedule 2, item 9, section 601VBE];

•

seeking further information about an application [Schedule 2, item 9, section 601VBG]; and

•

seeking the views of the licensed trustee company and its clients [Schedule 2, item 9, section 601VBH].

2.143 When the Minister is considering the interests of clients, it is a reference to the interests of the clients, when viewed as a group . [Schedule 2, item 9, section 601VCB]

2.144 The Minister is required to make a decision within 30 days after receiving such an application. However, the Minister may, before the end of 30 days, extend the period in which the decision must be made to 60 days . [Schedule 2, item 9, subsections 601VBI(1) and (2)]

2.145 Time does not run while a request for further information is outstanding (see subsection 601VBG(1)) . [Schedule 2, item 9, subsection 601VBI(4]

2.146 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 [Schedule 2, item 9, subsection 601VBI(3)], unless an unacceptable control situation exists [Schedule 2, item 9, subsection 601VBI(5)].

2.147 If a person holds approval under section 601VBB, they must notify ASIC, in writing, if they become aware they have breached a condition to which the approval is subject . [Schedule 2, item 9, subsection 601VBD(8)]

•

Failure to do so is an offence. The maximum penalty is 60 penalty units or imprisonment for 12 months, or both [Schedule 2, item 28, item 173M in the table].

•

Also, the Minister may revoke an approval if the Minister is satisfied that there has been such a contravention of a condition of approval [Schedule 2, item 9, paragraph 601VBF(1)(c)].

Powers of the Court relating to unacceptable control situations

Court orders

2.148 The Court has the power to make orders, as it considers appropriate, for the purposes of remedying an unacceptable control situation . [Schedule 2, item 9, subsection 601VAC(1)]

2.149 The Court's orders may include (but are not limited to), an order:

•

directing the disposal of shares;

•

restraining the exercise of any rights attached to shares;

•

prohibiting or deferring payment of sums due to a person in respect of shares held by the person;

•

that any exercise of rights attached to shares be disregarded;

•

directing any person to do or refrain from doing a specified act, for the purposes of compliance with other orders made; or

•

containing ancillary or consequential provisions as the court thinks just.

[Schedule 2, item 9, subsection 601VAC(3)]

2.150 The Court may only make an order, on application, by specified parties which are:

•

the Minister;

•

ASIC;

•

the trustee company;

•

a person who has voting power in the trustee company; or

•

a client of the trustee company.

[Schedule 2, item 9, subsection 601VAC(2)]

2.151 The court may rescind, vary or discharge an order, or suspend the operation of an order . [Schedule 2, item 9, subsection 601VAC(6)]

Injunctions

2.152 There is a general provision with respect to injunctions in section 1324. The Schedule provides that, if any conduct amounts or would amount to a contravention of Part 5D.5, a trustee company is a person whose interests may be affected, and who thus may apply to the court for an injunction. The class of persons 'whose interests are affected' is not limited by subsection (1) . [Schedule 2, item 9, subsections 601VAD(1) and (2)]

2.153 The Minister has the same powers as ASIC to apply for an injunction if the conduct of a trustee company amounts to a contravention of this Part . [Schedule 2, item 9, subsection 601VAD(3)]

2.154 The power to grant remedial orders in section 601VAC and the general injunction power in section 1324 do not, by implication, limit each other . [Schedule 2, item 9, subsection 601VAD(4)]

Other matters

Acquisition of property

2.155 The court must not make a remedial order under section 601VAC if the order would result in the acquisition of property from a person otherwise than on just terms. The court must also not make such an order whereby the order would be invalid because of paragraph 51(xxxi) of the Constitution . Acquisition of property has the same meaning as in paragraph 51(xxxi) of the Constitution, and just terms has the same meaning as in paragraph 51(xxxi) of the Constitution . [Schedule 2, item 9, section 601VCA]

Anti-avoidance

2.156 Section 601VCC outlines the circumstances when the Minister may give the controller a written direction to cease having voting power. A person subject to a written direction must comply with the direction . [Schedule 2, item 9, subsections 601VCC(1) and (2)]

2.157 The section is directed at situations in which a person or persons enter into, begin to carry out or carry out a scheme, for the sole or dominant purpose of avoiding the application of Division 1 of Part 5D.5, and as a result of the scheme, a person (the controller) increases the controller's voting power in a licensed trustee company. 'Scheme' is not defined . [Schedule 2, item 9, subsection 601VCC(1)]

2.158 Failure to comply with a direction is an offence, to prevent avoidance of the application of Division 1 dealing with unacceptable control situations. The maximum penalty is 120 penalty units or imprisonment for two years, or both . [Schedule 2, item 9, subsection 601VCC(2)]

2.159 Subsection (3) states that a direction under subsection (1) is not a legislative instrument. This provision is included to assist readers, as the instrument is not a legislative instrument within the meaning of section 5 of the Legislative Instruments Act 2003 (Legislative Instruments Act) on general principles . [Schedule 2, item 9, subsection 601VCC(3)]

2.160 For the purposes of this section , increase voting power includes increasing it from a starting point of nil . [Schedule 2, item 9, subsection 601VCC(4)]

Part 5D.6 - Consequences of cancellation of Australian financial services licence

2.161 Because a trustee company requires an AFSL to provide traditional trustee company services, if ASIC cancels its AFSL, the company can no longer provide the services, potentially leaving clients without an entity to manage or administer estates in which they have an interest. (This is subject to section 915H, which provides that when ASIC suspends or cancels an AFSL, ASIC may specify that the licence continues in effect for the purposes of specified provisions of the Corporations Act in relation to specified matters, a specified period, or both.)

2.162 Part 5D.6 deals with this situation by providing for the transfer of estate assets and liabilities from the former licensed trustee company to another licensed trustee company, if certain conditions are satisfied.

2.163 Broadly, there is a two-stage process in which:

•

ASIC makes a compulsory transfer determination, if specified conditions are satisfied. This means there is to be a transfer of estate assets and liabilities to a new licensed trustee company (the receiving company);

•

Second, ASIC issues a certificate of transfer, to effect the transfer of estate assets and liabilities to the receiving company, if specified conditions are satisfied.

Key definitions for the Part

2.164 Subsection 601WAA(1) defines several key terms for the purposes of this Part dealing with the consequences of cancellation of an AFSL.

•

asset includes, in general terms, any legal or equitable estate or interest in real or personal property, whether present or future, vested or contingent, tangible or intangible. It also covers any chose in action; any right, interest or claim of any kind; and any capital gains tax (CGT) asset [Schedule 2, item 9, subsection 601WAA(1)];

•

cancel in relation to a licence means the cancellation of a licence under Part 7.6 or a variation of the licence so that it ceases to cover traditional trustee company services [Schedule 2, item 9, subsection 601WAA(1)];

•

estate assets and liabilities means assets (including assets in common funds) and liabilities:

-

of an estate, in relation to which the trustee company (before its licence was cancelled) was performing estate management functions; and

-

that, immediately before the cancellation, were vested in the trustee company because it was performing those functions, or were otherwise assets and liabilities of the trustee company because of its performance of those functions [Schedule 2, item 9, subsection 601WAA(1)];

•

liability includes a duty or obligation of any kind, whether arising under an instrument or otherwise, and whether actual, contingent or prospective [Schedule 2, item 9, subsection 601WAA(1)].

2.165 The subsection also defines authorised ASIC officer, interest and licence.

2.166 ASIC may, in writing, authorise a person (who is a member of ASIC or its staff) to perform or exercise functions of powers under this Part . [Schedule 2, item 9, subsection 601WAA(2) and definition of authorised ASIC officer in section 601WAA]

Compulsory transfer determinations

2.167 If ASIC cancels the licence of a trustee company, ASIC, may, in writing, make a determination (which is a compulsory transfer determination) that there is to be a transfer of the estate assets and liabilities from the transferring company to another licensed trustee company (the receiving company).

2.168 ASIC can only make a compulsory transfer determination if:

•

either:

-

the Minister has consented to the transfer; or

-

the Minister's consent is not required [Schedule 2, item 9, paragraph 601WBA(2)(a)]; and

•

ASIC is satisfied that:

-

the transfer is in the interests of the clients of the transferring company (when viewed as a group) and clients of the receiving company (when viewed as a group). (Client is defined in subsection 601RAB(3) to only include a client being provided with traditional trustee company services) [Schedule 2, item 9, paragraph 601WBA(2)(a)]. (The Minister or ASIC may seek the views of the licensed trustee company and its clients, as part of the possible exercise of their powers.) [Schedule 2, item 9, section 601WCH];

•

the board of the receiving company has consented to the transfer. This consent is in force until it is withdraw by the board with the agreement of ASIC. ASIC may agree to allow the board to withdraw its consent, such as where circumstances have arisen since consent was given or taking into account other relevant matter [Schedule 2, item 9, section 601WBB];

•

State and Territory legislation (that satisfies section 601WBA) to facilitate the transfer has been enacted in the State or Territory [Schedule 2, item 9, paragraph 601WBA(2(b)(iv) and section 601WBC].

2.169 The determination must include particulars of the transfer, including the names of the transferring and receiving company and the extent of transfer of the estate assets and liabilities. The determination must also include a statement of reasons why the determination has been made . [Schedule 2, item 9, subsections 601WBA(3) and (4)]

2.170 Subsection (5) states that the determination is not a legislative instrument. This provision is included to assist readers, as the instrument is not a legislative instrument within the meaning of section 5 of the Legislative Instruments Act on general principles . [Schedule 2, item 9, subsection 601WBA(5)]

Minister's power to decide that consent not required

2.171 Under section 601WBD, the Minister's consent is not required if the Minister has determined in writing that his or her consent is not required in relation to the transfer or a class of transfers. The regulations may prescribe criteria to be taken into account by the Minister in deciding whether to make a determination . [Schedule 2, item 9, subsections 601WBD(1) and (2)]

2.172 Subsections (3) and (4) clarify when a determination is, or is not, a legislative instrument. These provisions are included to assist readers, as a single transfer determination is not a legislative instrument within the meaning of section 5 of the Legislative Instruments Act on general principles . [Schedule 2, item 9, subsections 601WBD(3) and (4)]

Determinations may impose conditions

2.173 The determination may impose conditions on the receiving or transferring company, either or both, before or after the certificate of transfer has been issued . [Schedule 2, item 9, subsection 601WBE(1)]

2.174 ASIC may vary or revoke determinations if it considers it appropriate. The transferring or receiving company may also apply to ASIC for variation or revocation for conditions imposed under paragraph 601WBE(1)(b), that is, after the certificate of transfer has been issued. ASIC must notify the relevant company of its action or decision in writing . [Schedule 2, item 9, subsections 601WBE(2) and (3)]

2.175 It is an offence for the transferring or receiving company not to comply with conditions imposed by ASIC, to ensure compliance with this provision. The maximum penalty is 50 penalty units . [Schedule 2, item 9, subsection 601WBE(5); item 28, item 173P in the table]

2.176 Subsection 601WBE(6) specifies that a transferring company or a receiving company does not commit an offence against the Corporations Act merely because the company is complying with a condition imposed by ASIC. A defendant bears the evidential proof in relation to the defence under subsection 601WBE(6), as these are matters squarely within the knowledge of the defendant . [Schedule 2, item 9, subsection 601WBE(6)]

Notice of determination

2.177 ASIC must give a copy of the determination to the transferring and receiving company . [Schedule 2, item 9, section 601WBF]

Certificate of transfer

2.178 If ASIC has made a compulsory transfer determination, and ASIC considers that the transfer should go ahead and consent of the board under subparagraph 601WBA(2)(b)(iii) has not been withdrawn, ASIC must issue, in writing, a certificate (known as a certificate of transfer) that the transfer is to take effect . [Schedule 2, item 9, subsection 601WBG(1)]

2.179 The certificate of transfer must include the names of the transferring and receiving company, the details of the extent of transfer of estate assets and liabilities, and when the certificate is to come into force [Schedule 2, item 9, subsection 601WBG(2)]. The certificate comes into effect in accordance with the statement in the certificate [Schedule 2, item 9, subsection 601WBG(4)].

2.180 The certificate may include provisions specifying, or specifying a mechanism for determining, other things that are to happen, or that are taken to be the case, in relation to the assets and liabilities subject to the transfer . [Schedule 2, item 9, subsection 601WBG(3)]

2.181 Subsection (5) clarifies that the certificate is not a legislative instrument. This provision is included to assist readers, as the instrument is not a legislative instrument within the meaning of section 5 of the Legislative Instruments Act on general principles . [Schedule 2, item 9, subsection 601WBG(5)]

Notice of certificate

2.182 ASIC must give a copy of the certificate of transfer to the transferring and receiving company, and must publish notice of the issue of the certificate (publish means in accordance with the regulations: see section 601RAA) . [Schedule 2, item 9, section 601WBH]

Time and effect of compulsory transfer

2.183 The effect of a certificate coming into force is that the receiving company becomes the successor in law of the transferring company in relation to the estate assets and liabilities, to the extent of the transfer. If the certificate includes provisions of a kind specified in subsection 601WBG(3) (that is, provisions that specify other things that are to happen, or that are taken to be the case), those things are taken to happen, or to be the case . [Schedule 2, item 9, section 601WBI]

Substitution of trustee company

2.184 Further, the receiving company is substituted for any appointment or nomination (for example as trustee, executor or administrator) of the transferring company in relation to estate assets and liabilities . [Schedule 2, item 9, section 601WBJ]

Liabilities for breach of trust and other matters

2.185 This Part does not apply to or affect liabilities of the transferring company for:

•

any breach of trust;

•

any other misfeasance or nonfeasance; or

•

any exercise of, or failure to exercise, any discretion.

[Schedule 2, item 9, subsection 601WBK(1)]

2.186 This Part does not affect any rights of the transferring company, or of an officer or employee of the transferring company, to indemnity in respect of such liabilities . [Schedule 2, item 9, subsection 601WBK(2)]

Other matters related to transfer of estate assets and liabilities

2.187 Division 3 deals with various other matters in relation to the transfer of estate assets and liabilities, including:

•

an authorised ASIC officer may certify that a specified asset or liability becomes an asset or liability of the receiving body [Schedule 2, item 9, section 601WCA];

•

enabling certificates in relation to land, interests in land and other assets to be dealt with, and given effect to, in certain circumstances [Schedule 2, item 9, sections 601WCB and 601WCC];

•

documents purporting to be a certificate under this Division is taken to be such a certificate, unless the contrary is established [Schedule 2, item 9, section 601WCD];

•

from when a certificate of transfer comes into force, a reference to a transferring company in relation to assets and liabilities transferred under this Part, is taken to be a reference to the receiving company [Schedule 2, item 9, section 601WCE];

•

the transferring company must promptly account to the receiving company for any income or other distribution received if the income or distribution arises from assets transferred under this Part - consistently with other provisions in the Corporations Act, failure to comply is an offence [Schedule 2, item 9, section 601WCF; item 28, item 173Q in the table];

•

the transferring company must, at the request of the receiving company, give the receiving company access to all of the books in its possession that relate to assets or liabilities transferred under this Part . Books is defined in existing section 9 of the Corporations Act. Consistently with other provisions in the Corporations Act, failure to comply is an offence [Schedule 2, item 9, section 601WCG; item 28, item 173R in the table]; and

•

for the purpose of deciding whether to exercise powers under this Part, the Minister or ASIC may seek the views of a trustee company or its clients [Schedule 2, item 9, section 601WCH].

Miscellaneous

2.188 Division 4 of Part 5D.6 deals with miscellaneous provisions.

2.189 Section 601WDA includes the obligation of the transferring company to notify persons of the cancellation of its licence and the transfer of estate assets and liabilities to the receiving company. This is to ensure that, as far as possible, persons affected by the cessation of the trustee company's business have notice of it.

2.190 The trustee company (when its licence is cancelled) must, as soon as practicable, take all reasonable steps to contact the following persons, and advise them of the cancellation of the licence:

•

all persons who have executed and lodged, such as wills, that have not yet come into effect, but will potentially lead to estate assets and liabilities being held by the trustee company;

•

all persons who have appointed the trustee company as trustee or to some other capacity.

[Schedule 2, item 9, subsection 601WDA(1)]

2.191 The trustee company must also publish notice of the cancellation of the licence . [Schedule 2, item 9, paragraph 601WDA(1)(b)]

2.192 Further, if a certificate of transfer comes into force, the trustee company must, as soon as practicable, take all reasonable steps to contact the persons referred to above and advise them of the transfer of estate assets and liabilities to the receiving company . [Schedule 2, item 9, subsection 601WDA(2)]

2.193 Failure to comply with subsections 601WDA(1) and (2) is an offence, to ensure that the obligation to notify interested persons is upheld. The maximum penalty is 120 penalty units or imprisonment for two years, or both.

Part 5D.7 - Effect of contraventions

Civil liability of licensed trustee company

2.194 Section 601XAA provides that a person who has suffered loss or damage because of the conduct of a licensed trustee company that contravenes Chapter 5D may take proceedings against the trustee company to recover the loss or damage. There is a limitation period of six years on bringing actions . [Schedule 2, item 9, subsections 601XAA(1) and 601XAA(3)]

2.195 Subsection (2) clarifies that charging a person an excess fee (which is paid by the person) gives rise to a loss that is recoverable under subsection (1) . [Schedule 2, item 9, subsection 601XAA(2)]

2.196 The section does not affect any liability under other provisions of the Corporations Act or other laws . [Schedule 2, item 9, subsection 601XAA(4)]

Part 5D.8 - Exemptions and modifications

2.197 It is considered appropriate to include exemption and modification powers, for example, to reflect subsequent changes in the charging and disclosure of fees, or changes in State and Territory laws and procedures concerning administration of estates and the powers of courts.

ASIC exemption and modification power

2.198 ASIC has the power to make exemptions or modifications to Chapter 5D. This is considered necessary to ensure the provisions can apply with appropriate flexibility (for example, ASIC can issue class order relief where necessary). ASIC may:

•

exempt a person or class of persons, or an estate or class of estates, from all or specified provisions of this chapter; or

•

declare that this chapter applies to a person or class of persons, or an estate or class of estates, as if specified provisions were omitted, modified or varied as specified in the declaration.

[Schedule 2, item 9, subsection 601YAA(1)]

2.199 An exemption may apply unconditionally or subject to specified conditions. A person must comply with a condition specified in the exemption and the Court may order a person to comply. Only ASIC may apply to the Court for such an order . [Schedule 2, item 9, subsection 601YAA(2)]

2.200 An exemption or declaration is a legislative instrument if it expressed to apply to a class of persons or a class of estates [Schedule 2, item 9, subsection 601YAA(3)]. If this does not apply, ASIC must publish notice of the exemption or declaration in the Gazette. The exemption or determination is not a legislative instrument. The statement at the end of subsection (4) is included to assist readers, as a single person exemption or declaration is not a legislative instrument within the meaning of section 5 of the Legislative Instruments Act on general principles [Schedule 2, item 9, subsections 601YAA(4)].

2.201 The provisions contain a requirement that ASIC must notify a person in writing about a declaration or make it available on the Internet before such a declaration can result in the person having any additional criminal liability. Generally, exemptions are not subject to the same notice requirements, as contraventions of exemptions do not give rise to any additional criminal liability. These provisions will ensure that people cannot potentially be subject to criminal liability for failing to comply with requirements about which they could not have been aware . [Schedule 2, item 9, subsection 601YAA(5)]

2.202 Subsection (6) defines the meaning of provisions of this chapter for the purposes of section 601YAA . [Schedule 2, item 9, subsection 601YAA(6)]

Exemptions and modifications by regulations

2.203 The regulations may also:

•

exempt a person or class of persons from all or specified provisions of this chapter; or

•

declare that this chapter applies to a person or class of persons as if specified provisions were omitted, modified or varied as specified in the declaration.

[Schedule 2, item 9, subsection 601YAB(1)]

2.204 These powers are considered necessary as there may be certain situations that may give rise to a need to modify a provision of new Chapter 5D, or to exempt a person from a provision of Chapter 5D. For example, it may be appropriate to exempt persons from, or modify the effect of, the fee charging provisions. Also, it may be desirable to modify the duties of officers and employees of licensed trustee companies.

2.205 Subsection (2) defines the meaning of provisions of this chapter for the purposes of section 601YAB . [Schedule 2, item 9, subsection 601YAB(2)]

Regulating traditional trustee company services as financial services under Chapter 7 of the Corporations Act

2.206 Amendments are made to Chapter 7 to regulate traditional trustee company services under Chapter 7, as appropriate. In particular, the licensing and general conduct obligations will apply to trustee companies. Certain disclosure obligations may also apply, notably the obligation to provide retail clients of trustee companies with a Financial Services Guide. The detailed application of these rules will be set out in regulations.

Traditional trustee company services are generally provided to retail clients

2.207 An amendment is made to the definition of a retail client in existing section 761G to provide that traditional trustee company services are always provided to persons as retail clients, unless the regulations otherwise provide. Many obligations in Chapter 7 only apply where a product or service is provided to a retail client, for example, an FSG must only be supplied where a financial service is provided to a retail client. Regulations enable this provision to be modified as appropriate . [Schedule 2, items 15 and 16, subsection 761G(6A)]

2.208 This provision provides flexibility to make special provisions about whether a client of a trustee company is a retail or wholesale client. This then determines for example who should receive the disclosure prescribed by Chapter 7. Classification as a retail or wholesale client determines whether certain obligations under Chapter 7 apply or not. For example, provision of a Financial Services Guide is dependent on the client being a retail client: section 941A.

2.209 A related amendment is also made to subsections 761G(7) and 761GA to provide that a person is not considered to be a wholesale client in specified circumstances . [Schedule 2, items 17 and 18, subsection 761G(7) and section 761GA]

Traditional trustee company services provided by trustee companies are financial services

2.210 Amendments to existing subsection 766A(1) provide that the provision of a traditional trustee company service by a trustee company is taken to be the provision of a financial service. This means the trustee company will need an AFSL to provide traditional trustee company services, as a person who carries on a financial services business must be licensed to provide that service . [Schedule 2, item 19, subsection 766A(1A)]

2.211 The regulations may, in relation to a traditional trustee company service of a particular class, prescribe the person or persons to whom a service of that class is taken to be provided . [Schedule 2, item 19, subsection 766A(1B)]

2.212 A further change is made to existing subsection 911A(4) to ensure that persons who provide traditional trustee company services are not exempt from the need to hold an AFSL due to subsection 991A(2) (which provides a list of persons that are exempt from the requirement to obtain an AFSL) . [Schedule 2, item 20, subsection 911A(4)]

2.213 Subsection 915B(3) gives ASIC powers to suspend or cancel an AFSL of a body corporate if certain things happen. An amendment is made to the effect that ASIC may cancel or suspend the AFSL of a trustee company if its clients have suffered or are likely to suffer losses because the company has breached the Corporations Act or the financial services law as defined. This gives ASIC powers to proceed against a licensed trustee company engaging in inappropriate conduct where it considers that the conduct is of a sufficiently serious nature to warrant such proceedings . [Schedule 2, item 24, paragraph 915B(3)(ca)]

2.214 Amendments are made to section 912D to ensure that an AFSL providing traditional trustee company services must notify ASIC of breaches or likely breaches, relating to non-compliance with financial services law, which for this purpose includes a breach of Commonwealth, State or Territory legislation, or a rule of common law or equity . [Schedule 2, items 21 to 23, subparagraphs 912D(1)(a)(iii) and 912D(1)(a)(iv)]

2.215 Amendments are made to the definition of financial services law in existing section 761A, so that it includes new Chapter 5D and also includes any rule of common law or equity covering conduct by an AFSL relating to traditional trustee company services . [Schedule 2, items 10 and 11, section 761A and paragraph 761A(e)]

Other amendments

Application of Chapter 5D to the Crown

2.216 Section 5A deals with the application of the Corporations Act to the Crown. Schedule 2 amends subsection 5A(4) to provide that a provision of new Chapter 5D only binds the Crown in a particular capacity in circumstances (if any) specified in the regulations. "Crown" includes the Crown in right of the Commonwealth, a State, or the Northern Territory or the Australian Capital Territory. This is to ensure that, for example, a public trust office of a State or Territory could be covered by Chapter 5D (if the relevant State or Territory agreed) . [Schedule 2, item 4, subsection 5A(4)]

Court order required before trustee company can be voluntarily wound up if estates remain unadministered

2.217 Schedule 2 amends section 490 of the Corporations Act to provide that, if a trustee company wishes to be voluntarily wound up, and any estates under its control remain unadministered, the company must obtain a court order. A person with a proper interest in the estate is entitled to be heard in any proceedings for leave to voluntarily wind up the company. This provision does not extend to voluntary administration . [Schedule 2, items 3 and 4, subsection 490(1), paragraph 490(1)(c) and subsection 490(2)]

Dealing with clients' money

2.218 Division 2 of Part 7.8 makes provision for dealing with clients' money. Amendments to subsection 981A(2) provide that Division 2 does not regulate clients' money paid for the provision of traditional trustee company services provided by the trustee company. This means that the rules of Chapter 5D, and any preserved rules under State or Territory law, will apply to clients' money . [Schedule 2, item 25, paragraph 981A(2)(ca)]

Civil and criminal penalties

2.219 Subsection 1311(1A) of the Corporations Act states that the general penalty provisions of the Act only apply to a provision if a penalty is set out in Schedule 3 to the Act for that provision. Schedule 2, item 26 adds Chapter 5D to that list . [Schedule 2, item 26, paragraph 1311(1A)(daa)]

2.220 Subsection 1317E(1) of the Corporations Act lists a number of provisions in respect of which, if the Court is satisfied that a person has contravened the provision, it must make a declaration of (civil) contravention. Schedule 2, item 23 adds the duties of officers and employees of trustee companies to that list . [Schedule 2, item 27, paragraph 1317(1)(jaaa) and (jab)]

Consequential amendments of Corporations Act and other Acts

Corporations Act amendments

2.221 Consequential changes are made to insert definitions of licensed trustee company, traditional trustee company services and trustee company in existing section 761A (existing definitions for Chapter 7). These definitions have the same meaning as set out in Chapter 5D . [Schedule 2, items 12 to 14, section 761A]

2.222 Chapter 2L of the Corporations Act regulates debentures. Section 283AC sets out the entities, including trustee companies (paragraph (1)(b)), that can be appointed as trustees of debenture issues. The Schedule amends paragraph 1(b) to update the definition of 'licensed trustee company' for the purposes of this provision . [Schedule 2, item 6, paragraph 283AC(1)(aa)]

2.223 The general penalty provisions (section 1311) are amended to ensure that subsection 1311(1), the 'default' offence provision of the Corporations Act, only applies to a provision in Chapter 5D if a penalty is set out in Schedule 3 to the Corporations Act . [Schedule 2, item 26, paragraph 1311(1A)(daa)]

2.224 Section 1317E of Part 9.4 (Civil consequences of contravening civil penalty provisions) is amended to provide that if a court is satisfied that either of subsection 601UAA(2) or 601UAB(2) (duties of officers or employees of licensed trustee companies) is contravened, the Court must make a declaration of contravention . [Schedule 2, item 27, paragraphs 1317E(1)(jaaa) and (jaab)]

ASIC Act amendments

2.225 Amendments are made to ensure that the ASIC Act contains similar powers and functions, in relation to licensed trustee companies and traditional trustee company services, to those that are being inserted into the Corporations Act (in new Chapter 5D and Chapter 7).

2.226 Accordingly, the interpretation provision of the ASIC Act, subsection 12BA(1), is amended to include definitions of traditional trustee company services and trustee company. [Schedule 2, items 1 and 2, subsection 12BA(1)]

2.227 Also, the meaning of financial service in section 12BAB is amended to ensure that it includes the provision by a trustee company of a traditional trustee company service. The regulations may, in relation to a traditional trustee company service of particular class, prescribe the person or persons to whom a service of that class is taken to be provided or supplied . [Schedule 2, item 3, subsections 12BAB(1A) and (1B)]

Commencement and transitional provisions

2.228 Schedule 2 to the proposed Schedule dealing with trustee companies commences on a single day to be fixed by proclamation. However, if any of the provisions do not commence within six months from the day the Bill receives Royal Assent, they commence on the first day after the end of that period . [Schedule 2, item 2, item 3 in the table]

2.229 The delay in commencement, but for no longer than six months, allows the States and Territory Governments to amend their laws, so they are consistent with the Commonwealth regime.

2.230 Schedule 5, the transitional provisions, commences on Royal Assent. However, the operation of the transitional provisions is tied to the commencement of Schedule 2.

2.231 Transitional provisions are made to ensure that existing trustee companies are able to continue providing their services to clients before they are issued with an AFSL authorising them to provide traditional trustee company services. Without these provisions, these services would have to be interrupted when the new Commonwealth legislation took effect, and could only be resumed once the AFSL was issued.

2.232 To enable the transitional provisions to operate, Division 2 of Schedule 5 creates definitions of 'amending Schedule', 'commencement' and 'modify' . [Schedule 2, section 1493]

Transitional provisions relating to limit on control of trustee companies

2.233 Substantively, in relation to Part 5D.5 (limit on control of trustee companies) the transitional provisions provide relief for existing authorised trustee companies where a person's voting power already exceeds 15 per cent. The provision, in effect, permits the person to retain their pre-commencement percentage. Where a person subsequently exceeds their pre-commencement percentage, the normal rules of Part 5D.5 apply. There are special rules where a person's percentage is subsequently reduced . [Schedule 2, section 1494]

Transitional provisions relating to the amendments of Chapter 7

2.234 A trustee company that is listed in the regulations under section 601RAB, and that, at that time, already holds an AFSL, is taken to be authorised under its AFSL to provide traditional trustee company services for a period of six months starting on the date of commencement of the regulations providing the list of trustee companies . [Schedule 2, paragraph 1495(2)(a)]

2.235 The provisions regarding the disclosure to clients of changed fees (see section 601TAB) also do not apply during this period. However, this does not extend to the requirement that the trustee company must disclose its current schedule of fees on a website maintained by or on behalf of the company (section 601TAA) . [Schedule 2, paragraph 1495(2)(b)]

2.236 It is also provided that the requirements in Part 7.7 of the Corporations Act do not apply during this period. Part 7.7 contains provisions relating to the FSG and statements of advice. At the end of the six month period, a trustee company can only provide traditional trustee company services if it has obtained an AFSL . [Schedule 2, paragraph 1495(2)(c)]

2.237 To avoid doubt, ASIC powers under Part 7.6 (licensing of financial service providers) are not limited in relation to the company's AFSL . [Schedule 2, subsection 1495(3)]

Example 2.2

For example, during the six month period, ASIC may impose or vary licence conditions in relation to the deemed licence.

General power for regulations to deal with transitional matters

2.238 There is a regulation power to deal with transitional matters and it may for those purposes modify this Bill. This is designed to ensure that there is a smooth transition from State and Territory regulation to Commonwealth regulation . [Schedule 2, section 1496]