House of Representatives

Explanatory Memorandum

(Circulated by the authority of the Assistant Treasurer and Minister for Financial Services and Superannuation, the Hon Bill Shorten MP)

Chapter 1 Assisting transition to national regulation and restructuring of trustee companies

Outline of chapter

1.1 The Bill provides an administrative process for the voluntary transfer of estate assets and liabilities from a transferring entity (generally, a trustee company previously authorised under State or Territory legislation) to a trustee company prescribed by the Corporations Regulations 2001 (Regulations). It also improves the existing compulsory transfer regime, specifies criteria for the Minister to consider when assessing trustee company applications, makes it an offence for a person to falsely represent itself to be a licensed trustee company, and replaces the now outdated term 'authorised trustee corporation'.

Context of amendments

1.2 Prior to the commencement of a national regulatory framework for trustee companies on 6 May 2010 and under the former State and Territory (State) based system, many corporate groups operating across State borders operated multiple subsidiaries whose purpose was to hold a trustee company authorisation in a particular jurisdiction. With the advent of national licensing, many corporate groups wish to transfer the 'traditional' business of these subsidiaries (namely, the management of trusts and estates) to a single Australian financial services licence (AFSL) holder with a trustee company authorisation. The Government supports the rationalisation of the industry as an important way of reducing compliance costs. However, no feasible and cost-effective process for transferring large numbers of trusts and estates currently exists. As the TCA has put it, the industry is seeking an administrative (rather than a judicial) process to 'allow existing trustee companies to expeditiously, and at minimum cost, rationalise their operations by transferring all estate management functions to one licensed trustee company within the same group.' However, transfers need not be confined to intra-group situations.

1.3 At present, Chapter 5D provides for compulsory, but not voluntary, transfers of business. The voluntary transfer process is similar to the already existing compulsory transfer process. The change is being made by extending the existing compulsory transfer provisions in Part 5D.6 to include voluntary transfers. Complementary State legislation would also be required to make the voluntary transfer regime fully effective (e.g. to effect land title transfers).

1.4 Currently, Chapter 5D precludes the transfer of trustee company business from a licence-cancelled company to a State Public Trustee by virtue of subsection 601WBA(1) (because the Public Trustees are not licensed trustee companies). It is appropriate and important for the purpose of protecting the assets and stakeholders of failing or demonstrably non-compliant licensed trustee companies to rectify this situation by creating an exception to allow compulsory transfers to State Public Trustees.

1.5 At present there is no formal procedure under which a prospective licensee applies to the Government to be listed as a licensed trustee corporation. This contrasts with the former State based system where most jurisdictions published administrative (rather than legislative) criteria for applicants.

1.6 To preserve the integrity of the new regime in Chapter 5D and to prevent misrepresentations to the public, an entity should be prohibited from holding itself out as a 'licensed trustee company' unless it holds an AFSL with a trustee company authorisation.

1.7 The term 'authorised trustee corporation' is used throughout the Corporations Act with reference to marketable securities, and the right to marketable securities. It is only applicable to a body corporate which has been declared an authorised trustee corporation by the regulations made under the Corporations Act. Broadly, any body corporate which holds marketable securities, or the right to marketable securities, in trust for the beneficial owner of the securities as an ordinary part of its business, will be declared an authorised trustee corporation. The list of authorised trustee corporations is in Schedule 9 of the Corporations Regulations. With the advent of licensed trustee companies, it is necessary to delete the old term 'authorised trustee corporation' where it appears in the Corporations Act and replace it with the term 'a licensed trustee company within the meaning of Chapter 5D or the Public Trustee of a State or Territory'. A similar change is also made to the Corporations (Aboriginal and Torres Strait Islander) Act 2006 .

Summary of new law

1.8 The Bill deals with:

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voluntary transfers of trustee business between entities;

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compulsory transfers of business to Public Trustees;

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Ministerial approval for listing of a trustee company;

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prohibiting persons from holding themselves out as a licensed trustee company when that is not the case; and

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replacing the term 'authorised trustee corporation'.

Comparison of key features of new law and current law

Detailed explanation of new law

ASIC-approved (compulsory and voluntary) transfers of estate assets and liabilities

1.9 Where ASIC has cancelled the AFSL of a licensed trustee company, Part 5D.6 of the Corporations Act provides for the transfer of estate assets and liabilities from the former licensee to another licensed trustee company, if certain conditions are satisfied.

1.10 Subsection 601WAA(1) of the Corporations Act defines several key terms for the purposes of Part 5D.6 which deals with the consequences of cancellation of an AFSL. The following definition substitutes for the current definition of 'estate assets and liabilities':

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estate assets and liabilities , of a company, means assets (including assets in common funds) and liabilities of an estate, or incurred in relation to an estate, in relation to which the company was performing estate management functions, if the assets and liabilities were vested in or otherwise belonged to the company:

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(a) because of its performance of those functions; and

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(b) immediately before:

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(i) if ASIC has cancelled the company's licence-the cancellation; or

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(ii) otherwise-a relevant certificate of transfer comes into force. [Schedule 1, item 14, subsection 601WAA(1)]

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transfer determination has the meaning given by subsection 601WBA(1). [Schedule 1, item 15, subsection 601WAA(1)]

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voluntary transfer determination has the meaning given by subsection 601WBA(1). [Schedule 1, item 16, subsection 601WAA(1)]

1.11 In this context, where a company within a trustee company group relinquishes its licence, its future roles, such as 'appointments' as executor under wills written in its name and where probate has not yet been granted, may be voluntarily transferred to the licensed company in that group (this is made explicit in section 601WBJ).

1.12 Previously, under section 601WBA, ASIC could only make compulsory transfer determinations. This Bill amends the law to enable ASIC to also make voluntary transfer determinations.

1.13 Under subsection 601WBA(1) as amended by this Bill, ASIC can make a transfer determination if:

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ASIC has cancelled the licence of the transferring company (the determination is a compulsory transfer determination ); or

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the transferring company has applied in the prescribed form for a determination (the determination is a voluntary transfer determination). [Schedule 1, item 17, subsection 601WBA(1)]

1.14 The existing subsection 601WBA(2) of the Corporations Act provides for compulsory transfers of business. In addition to compulsory transfer determinations, the subsection is amended to provide for voluntary transfers of business. [Schedule 1, item 18, subsection 601WBA(2)]

1.15 Various technical amendments to Part 5D.6 of the Corporations Act are made to facilitate voluntary transfers of business. [Schedule 1 , item 19, subparagraph 601WBA(2 )( ab ); item 24, subparagraph 601WBA(3 )( d ); item 25, subsection 601WBE(1 ); item 26, section 601WBF ; item 27, paragraph 601WBG(1 )( a ); item 29, paragraph 601WBG(2 )( ca)]

1.16 Division 4 of Part 5D.6 deals with miscellaneous provisions. Subsections 601WDA(1) and (2) set out 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.

1.17 This Bill provides that (when there is a voluntary transfer determination) the transferring trustee company must, as soon as practicable, publish notice of the transfer of estate assets and liabilities. The meaning of the term publish is affected by section 601RAA and any regulations made thereunder. [Schedule 1, item 28, subsection 601WDA(3)] .

1.18 Failure to comply with subsection 601WDA(3) is an offence. The maximum penalty for non-compliance is 120 penalty units or imprisonment for 2 years, or both. This penalty is commensurate with the penalties imposed for other broadly similar offences under the Corporations Act. [Schedule 1, item 34, Schedule 3 to the Corporations Act, table item 173U]

Compulsory transfer of business to Public Trustee

1.19 In circumstances where a private licensed trustee company becomes unviable, the only practical option may be to transfer its business to a State Public Trustee, if only temporarily; for example, because no private licensed trustee company is able or willing to accept the transfer. Another example is that there may be an economic downturn in the local economy where the licensed trustee company operates which necessitates the transfer of its trustee company business to the State Public Trustee. These examples should not limit the circumstances in which a transfer to a State Public Trustee or a private licensed trustee company could be made.

1.20 Accordingly:

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for a compulsory transfer of business, the receiving company must be a licensed trustee company or the Public Trustee of a State or Territory (however described); [Schedule 1, item 19, paragraph 601WBA(2 )( aa)] ; and

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for a voluntary transfer, the transferring company must be a licensed trustee company or a company that was previously authorised as a trustee company under a law of a State or Territory, and the receiving company is a licensed trustee company. [Schedule 1, item 19, paragraph 601WBA(2 )( ab)]

1.21 The Bill recognises that Public Trustees are constituted in varying ways and have differing governance structures. It provides that a Public Trustee may be deemed to be a 'receiving company' for the purposes of a compulsory transfer determination, and that references to 'a company' or 'the board of a company' are taken to be references to a Public Trustee, as applicable. [Schedule 1, item 22, subsection 601WBA(2A)]

1.22 Various other technical amendments to Part 5D.6 of the Corporations Act are made to facilitate compulsory transfers of business to Public Trustees. [Schedule 1, item 20, subparagraph 601WBA(2 )( b )( ii ); item 21, subparagraph 601WBA(2 )( b )( iv)]

1.23 It is possible that neither a Public Trustee nor a private trustee company is prepared to accept a compulsory transfer of business. In that case, there is a distinction between the failed trustee company and the trusts and estates it administers.

1.24 A failed trustee company would be wound up in the normal way. The assets of trusts and estates would be quarantined from the trustee company's own assets, as the trustee company is not the beneficial owner, subject to the trustee company's right of indemnity.

1.25 In contrast, under the general law, there is no such thing as the winding up of a trust. State and Territory law may confer on the Court the power to appoint either a new trustee, for example in substitution for a corporate trustee which is in liquidation or is dissolved, or a new administrator or executor: see for example Trustee Act 1925 (NSW ) section 70 and Administration and Probate Act 1958 (Vic ), section 34.

Ministerial approval for listing of a trustee company

1.26 A formal procedure under which a prospective licensee applies to the Government to be listed as a licensed trustee corporation is required to increase transparency, certainty and accountability in the licensing process.

1.27 A prospective licensee will need to write to the Minister responsible for administering Chapter 5D explaining how it satisfies the following criteria before the Governor-General considers making a regulation about being listed as a licensed trustee company. The relevant considerations are that the applicant:

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is a corporation to which the corporations power in the Australian Constitution applies;

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undertakes to provide probate and deceased estate administration services and functions, and at least one other estate management function;

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is, and will continue to be, capable of providing the services and functions it has undertaken to provide;

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is a fit and proper person;

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is compliant with rules setting a limit on control of licensed trustee corporations; and

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satisfies any other matters that the Minister specifies by written notice to be relevant.

[Schedule 1, item 5, subsection 601RAB(2)]

1.28 It is expected that applicants will provide probate and deceased estate administration services and functions, as these are integral to the concept of a trustee company. In terms of capability, an applicant for listing would be expected to demonstrate that it has a strong financial basis and some level of professional expertise and/or experience.

1.29 These criteria are not intended to supersede the general and specific obligations of Australian financial service licensees (specifically, licensees with a trustee company authorisation) as set out in the Corporations Act and in the Australian Securities and Investments Commission's (ASIC's) guidance.

Prohibition on holding out as a licensed trustee company

1.30 A person is prohibited from holding itself out as a 'licensed trustee company' unless it holds an AFSL with a trustee company authorisation. [Schedule 1, item 33, section 601XAB]

1.31 Failure to comply with this prohibition is an offence. The maximum penalty for non-compliance is 50 penalty units or imprisonment for 12 months, or both. This is in line with the penalty for holding out under section 911C. [Schedule 1, item 36, Schedule 3 to the Corporations Act, table item 173V]

1.32 Because of section 1312, if a body corporate contravenes the regulations a court may impose a penalty of up to 5 times the penalty specified for the contravention. [Schedule 1, item 34, note to subsection 1364(2)]

Replacing the term 'authorised trustee corporation'

1.33 The term 'authorised trustee corporation' is deleted from the Corporations (Aboriginal and Torres Strait Islander) Act 2006 and replaced with the term 'a licensed trustee company within the meaning of Chapter 5D of the Corporations Act or the Public Trustee of a State or Territory'. [Schedule 1, items 1 and 2, section 700-1]

1.34 Similar amendments are also made to the Corporations Act. [Schedule 1, items 3 and 4, section 9 and paragraph 53(b)]