House of Representatives

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Jim Chalmers MP)

Glossary

This Explanatory Memorandum uses the following abbreviations and acronyms.

General outline and financial impact

Schedules 1-3 & 5 — Strengthening Australia's Financial Market Infrastructure regulatory framework

Schedules 1, 2 and 3 to the Bill implement recommendations of the Financial Market Infrastructure Regulatory Reforms: Advice to Government from the Council of Financial Regulators, July 2020 (CFR Advice to Government) to strengthen Australia's financial market infrastructure. The CFR Advice to Government makes sixteen recommendations for regulatory reform to strengthen Australia's financial market infrastructure.

The Bill implements the recommendations by:

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introducing a crisis management and resolution regime through the amendments in Schedule 1;

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enhancing ASIC and the RBA's licensing, supervisory and enforcement powers through the amendments in Schedule 2; and

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streamlining and adjusting roles and responsibilities between the Minister, ASIC and the RBA through the amendments in Schedule 3.

Schedule 5 to the Bill makes related minor and technical amendments to the Corporations Act, ASIC Act and Insurance Act 1973.

Outline

Schedules 1, 2 and 3 to the Bill implement the recommendations of the CFR Advice to Government to strengthen Australia's FMI regulatory framework.

Schedule 1 to the Bill amends the Corporations Act to implement the CFR Advice to Government to establish an FMI crisis resolution regime - enabling the RBA to step in and ensure the continuity of CS facility services in the face of a crisis (Recommendation 1). The amendments also establish regulatory powers for the RBA aimed at preventing crises.

Schedule 2 to the Bill implements recommendations of the CFR Advice to Government to:

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clarify the circumstances where a licence can be suspended or cancelled (Recommendation 3);

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amend the arrangements under which an overseas market operator or overseas CS facility operator is required to be licensed or exempt (Recommendation 4);

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provide ASIC with the power to impose limits on the scope and level of activity that a market licensee or CS facility licensee is permitted to undertake as an overseas licensee (Recommendation 5);

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require a domestic CS facility licensee to be domestically incorporated (Recommendation 6);

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provide ASIC with declaration powers with respect to declared financial markets (previously known as prescribed financial markets) and widely held market bodies (Recommendations 7 and 8);

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harmonise the arrangements for approving increases in voting power in widely held market bodies and in ASX Limited (Recommendation 9) – the amendments also increase the threshold for the Minister to approve increases in voting power in all widely held market bodies from 15 per cent to 20 per cent;

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implement a fit, proper and competent person standard for those involved in licensed FMIs (Recommendation 10);

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require ASIC approval for a person to hold more than 20 per cent voting power in domestically-incorporated FMI licensees that are not widely held market bodies (Recommendation 11);

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provide ASIC with the powers to make rules for the purpose of promoting the fair and effective provision of CS facility services (Recommendation 12);

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provide ASIC and the RBA with a power to obtain a report from an expert on specified matters (Recommendation 13);

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provide the RBA with directions powers that are aligned with its mandate (Recommendation 14).

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remove the qualification on the obligation of CS facility licensees to comply with Financial Stability Standards (Recommendation 15); and

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streamline ASIC's existing directions powers and remove the time limit on the period a direction may remain in place (Recommendation 16).

Schedule 3 amends the Corporations Act to transfer existing ministerial powers relating to the licensing and supervision of CS facilities and financial markets to ASIC and the RBA according to their respective areas of responsibility (Recommendation 2). These powers are currently delegated to ASIC in the instrument Ministerial Powers (ASIC) Delegations 2021.

Schedule 5 to the Bill makes related minor and technical amendments to the Corporations Act, ASIC Act and Insurance Act 1973.

Chapter 1 of this Explanatory Memorandum explains the amendments with respect to the new crisis resolution powers for the RBA (Schedule 1, Part 1). Chapter 2 explains the amendments that introduce crisis prevention powers for the RBA (Schedule 1, Part 2 and Schedule 2, Part 9). Chapter 3 explains the amendments that enhance and streamline the regulatory powers of the RBA and ASIC and transfer existing ministerial power to those regulators (Schedule 2 and Schedule 3) and associated minor and technical amendments in Schedule 5.

Date of effect

Schedule 1 to the Bill (except for the items 60, 61, 62, 63, 64, 65, and 66) commence 7 days after Royal Assent. The commencement of those items is contingent on the commencement of other Acts, these commencements are explained at paragraphs 1.344 and 2.98.

For Schedule 2 to the Bill:

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Parts 1 to 10, 12 and 13 commence 7 days after Royal Assent;

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Part 11 commences 6 months after Royal Assent; and

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Part 14's commencement is contingent on the commencement of another Act – see paragraph 3.195.

Schedule 3 to the Bill commences 7 days after Royal Assent.

Schedule 5 to the Bill commences on the day after Royal Assent.

Proposal announced

Schedules 1, 2 and 3 to the Bill partially implement the Modernising Australia's financial system measure announced on 14 December 2022.

Financial impact

Nil

Impact Analysis

The following reports were certified as equivalent to a Policy Impact Analysis relating to the amendments in this Bill.

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Financial Market Infrastructure Regulatory Reforms, 2020 Advice to Government from the Council of Financial Regulators

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Financial Market Infrastructure Regulatory Reforms, 2019 Consultation Paper, Council of Financial Regulators

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Financial System Inquiry Report, 2014

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IMF Financial Sector Assessment Program, 2019 Financial System Stability Assessment (Australia)

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IMF Financial Sector Assessment Program, 2019 Technical Note – Supervision, Oversight and Resolution Planning of Financial Market Infrastructures

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Overseas Clearing and Settlement Facilities: The Australian Licensing Regime, 2015 Consultation paper, Council of Financial Regulators

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Overseas Clearing and Settlement Facilities: The Australian Licensing Regime, 2015 Response to Consultation, Council of Financial Regulators

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Resolution Regime for Financial Market Infrastructures, 2015 Consultation Paper, Australian Government

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Resolution Regime for Financial Market Infrastructures, 2015 Response to Consultation, Council of Financial Regulators

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Review of Financial Market Infrastructure Regulation, 2011 Consultation Paper, Council of Financial Regulators

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Review of Financial Market Infrastructure Regulation, Advice to Government, Council of Financial Regulators

The executive summaries and recommendations contained in each report are included in this Explanatory Memorandum at Attachment 1.

Human rights implications

Schedules 1 to 3 to the Bill engage a number of human rights issues. See Statement of Compatibility with Human Rights — Chapter 5.

Compliance cost impact

This measure is estimated to have an annual average compliance cost for business of $0.3 million.

Schedule 4 — Climate-related financial disclosure

Outline

Schedule 4 to the Bill generally requires entities that lodge financial reports under Chapter 2M of the Corporations Act and meet certain minimum size thresholds, or have emissions reporting obligations under the NGER scheme, to make disclosures relating to climate in accordance with relevant sustainability standards made by the AASB. The amendments phase-in the new obligations for climate-related financial disclosure depending on entity size and type over a number of years.

Date of effect

Schedule 4 to the Bill commences the day after Royal Assent.

The new requirements generally apply to reporting entities from financial years starting on or after 1 January 2025.

Transitional provisions phase-in these new obligations, generally depending on the size and type of the reporting entity, over a number of years.

Proposal announced

Schedule 4 to the Bill fully implements the 'Mandating Climate-Related Financial Disclosure' measure in the 2023-2024 MYEFO.

Financial impact

Nil

Impact Analysis

The Impact Analysis relating to the amendments in Schedule 4 can be found at the Office of Impact Analysis website:

https://oia.pmc.gov.au/published-impact-analyses-and-reports/climate-risk-disclosure

Human rights implications

Schedule 4 to the Bill does not raise any human rights issues. See Statement of Compatibility with Human Rights — Chapter 5.

Compliance cost impact

Schedule 4 to the Bill is expected to increase regulatory costs by $1.0 to $1.3 million per year per entity, averaged over 10 years.

Chapter 1: Strengthening Australia's FMI regulatory framework - Establishing a crisis management regime

Outline of chapter

1.1 Schedule 1 to the Bill establishes the crisis management regime for domestic CS facilities. The amendments provide the RBA with powers to resolve crisis situations in CS facilities. The RBA's new crisis powers are explained in this Chapter. New powers for the RBA aimed at reducing the risk of a crisis occurring are explained in Chapter 2.

1.2 The amendments in Schedule 1 also establish a funding mechanism that is available to assist in resolving crisis situations.

1.3 All legislative references in this chapter are to the Corporations Act unless otherwise stated. Further, all references to "domestic CS facility licensee" in this Chapter are references to a body corporate registered under Chapter 2A who is granted an Australian CS facility licence under subsection 824B(1) of the Act unless the contrary intention is stated.

Context of amendments Australia's Financial Market Infrastructure

1.4 The entities that make up Australia's FMI are critical in facilitating and supporting Australia's capital markets. When these entities work well, they contribute to the financial stability, operational efficiency, and effective management of risk in Australian financial markets.

1.5 FMI entities are supervised either solely by ASIC, or, in respect of CS facilities, by both ASIC and the RBA. They are typically large and intertwined with the broader financial system.

1.6 These are, by necessity, highly regulated entities, as failure in any of these entities could have severe consequences for the operation of markets, and in turn damage the Australian economy.

1.7 Schedules 1, 2 and 3 to the Bill introduce a crisis management regime, granting powers to the RBA to provide for the management and resolution of a CS facility that has failed or is at risk of failing. New and enhanced regulatory powers are also provided to the RBA and ASIC to assist in mitigating and managing the risks FMI entities face and pose to the broader financial system. The amendments also transfer certain ministerial powers to regulators to streamline existing financial market regulation, and reflect their respective responsibilities.

Regulation of financial market infrastructure

1.8 Australia's FMI includes:

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financial markets (operated by financial market operators);

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clearing and settlement facilities;

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derivative trade repositories; and

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benchmark administrators.

1.9 These entities support trillions of dollars in securities and derivatives transactions each year.

1.10 The systemic importance of these entities calls for a high degree of regulation and supervision. Each of the entities mentioned above has a specific regulatory regime contained in Chapter 7 of the Act.

Financial Market Operators

1.11 Financial market operators provide the listing and trading services that allow financial products to be issued and traded on a financial market. They also facilitate transparent and competitive pricing of listed securities and derivatives and ensure fair and orderly trading.

1.12 A financial market is defined in the Act to be a facility through which offers to acquire or dispose of financial products are regularly made or accepted, or where offers or invitations are regularly made to acquire or dispose of financial products that are intended to result in the making of offers to acquire or dispose of financial products (see section 767A of the Act).

1.13 There are currently around 51 market licensees in Australia of which 37 are foreign bodies corporate.

1.14 Financial market operators are regulated under Part 7.2 of the Act. A person that operates a financial market in this jurisdiction must hold an Australian market licence unless the financial market is exempt from the operation of Part 7.2. The Minister has the power to, among other things, grant an Australian market licence and give directions to promote compliance with a licensee's obligations under Chapter 7 (including the obligation to comply with licence conditions). These powers are currently delegated to ASIC (see the Ministerial Powers (ASIC) Delegations 2021).

1.15 ASIC supervises licensed financial markets, issues market integrity rules, and monitors Australian market licensees' and participants' compliance with those rules. ASIC also monitors the compliance of Australian market licensees with the conditions of their licence and obligations set out in the Corporations Act. Market integrity rules made by ASIC can deal with the activities and conduct of licensed markets and of persons in relation to licensed markets and financial products traded on licensed markets (see paragraphs 798G(1)(a)-(c) of the Act).

CS facilities

1.16 CS facilities provide post-trade clearing and settlement of transactions. These facilities are integral to the functioning of financial markets.

1.17 CS facilities are defined in the Act as a facility that provides a regular mechanism for parties to transactions relating to financial products to meet obligations to each other that arise from entering the transactions and are of a kind prescribed in regulations (see section 768A(1) of the Act).

1.18 Clearing is a post-trade and pre-settlement risk management process which often involves novating (i.e. substituting attached rights and obligations of the parties to) trades to an entity known as a central counterparty which becomes the buyer to every seller and the seller to every buyer. Clearing provides transaction efficiency and allows counterparty risk to be managed centrally, enhancing investors ability to act confidently when trading on markets. Settlement involves the delivery of securities or cash from one party to another in accordance with the terms of the specific trade.

1.19 An operator of a CS facility is regulated under Part 7.3 of the Act. A person that operates a CS facility in this jurisdiction must hold an Australian CS facility licence unless the CS facility is exempt from the operation of Part 7.3 of the Act. The Minister has the power to, among other things, grant an Australian CS facility licence, impose licence conditions and issue directions to promote compliance with a licensee's obligations. These powers are currently delegated to ASIC under the Ministerial Powers (ASIC) Delegations 2021.

1.20 A licensed CS facility that is operated by a domestic CS facility licensee must have operating rules that deal with matters prescribed by regulations. These matters currently go to issues related to the of the operation of the facility, management of risk, the requirements of participants with respect to the facility, and other matters (see section 822A of the Act and regulation 7.3.05(a) to (j) of the Corporations Regulations). However, the requirement for the content of rules to contain prescribed content does not apply if the licensee is also authorised to operate the facility in the foreign country in which its principal place of business is located, and the licence was granted in that location.

1.21 The operating rules of a licensed CS facility have effect as a contract under seal between the licensee and issuers of financial products, between participants, and between participants and issuers of financial products. The operating rules are a market netting contract for the purposes of the PSN Act. Effectively, each party agrees to observe the operating rules and carry out their obligations under the rules. If changes to operating rules are made, a notice of those changes must be lodged with ASIC. The Minister can disallow changes to a domestic CS facility's operating rules – this power is currently delegated to ASIC under the Ministerial Powers (ASIC) Delegations 2021.

1.22 ASIC and the RBA have complementary supervisory responsibilities in relation to CS facility licensees. Broadly, ASIC has responsibility in relation to licensing and conduct of CS facility licensees and the RBA has responsibility in relation to financial stability and managing systemic risk.

1.23 The RBA does not have any enforcement powers but may make Financial Stability Standards under section 827D of the Act that applicable CS facilities must comply with. The RBA may assess how well a CS facility is complying with relevant standards and make reports to the Minister and ASIC.

1.24 There are currently four systemically important domestic CS facility licensees which are within the ASX Group. There are currently two overseas CS facility licensees operating in Australia that are licensed to operate as central counterparties for over-the-counter interest rate derivatives.

Derivative trade repositories

1.25 A derivative trade repository is a facility to which information about over-the-counter derivative transactions, or about positions relating to over-the-counter derivative transactions, can be reported. This information is provided to regulators to provide a picture of the activity and risks present in over-the-counter derivative markets. There are currently two derivative trade repository licensees licensed in Australia.

1.26 Derivative trade repository licensees are regulated under Part 7.5A of the Act. ASIC can make derivative trade repository rules that deal with the way licensees may provide their services, handling of data, governance of licensees, reporting and other matters (see Division 2 of Part 7.5A of the Act).

Financial benchmark administrators

1.27 Financial benchmarks measure the price or performance of certain financial products or classes of financial products. They are used to determine the price of, or payments due under, many financial products. Financial market benchmarks are defined in sub-section 908AB(1) of the Act.

1.28 Administrators of significant financial benchmarks must be licensed by ASIC. ASIC declares certain financial benchmarks to be significant financial benchmarks by legislative instrument under section 908AC of the Act. There are currently two benchmark administrator licensees operating in Australia. Benchmark administrator licensees are regulated under Part 7.5B of the Act. ASIC may impose, vary or revoke conditions on a licence.

1.29 ASIC can make two kinds of rules with respect to financial benchmarks. Firstly, the financial benchmark rules prescribe detailed requirements relating to the operation of financial benchmarks specified in a licence. Secondly, the compelled financial benchmark rules confer powers for ASIC to compel certain activity relating to significant financial benchmarks.

Other regulatory aspects of FMI entities

1.30 Certain Australian market licensees, CS facility licensees, and the holding companies of such licensees can be subject to ownership limits. Division 1 of Part 7.4 of the Act ensures Australia's national interest is considered in the control of significant licensees through a 15 per cent restriction on a person's voting power within certain bodies prescribed in regulations. These are known as widely held market bodies. Exceeding the 15 per cent voting power limit requires the approval of the Minister. Specific arrangements in this regard exist for ASX Limited, where a change in voting power above 15 per cent currently requires a regulation to be made.

1.31 This limit is imposed to ensure that Australia's national interest, and financial market integrity and stability are not at risk from the ownership of such widely held market bodies.

1.32 Division 2 of Part 7.4 of the Act provides for a mechanism to prohibit disqualified individuals from being associated with the management, ownership, or control of Australian market licensees, CS facility licensees, derivative trade repository licensees and licensed financial benchmark administrators. This mechanism applies to all licensees, not just widely held market bodies.

1.33 Part 7.5 of the Act establishes a requirement for each financial market licensee to have a compensation regime. However, Part 7.5 of the Act does not apply to financial markets that are licensed under subsection 795B(2) of the Act.

Council of Financial Regulators Advice to Government

1.34 The failure of an FMI can cause fundamental and systemic disruption to financial markets.

1.35 The CFR is the coordinating body for Australia's main financial regulatory agencies. Its members are APRA, ASIC, the RBA and The Treasury. The CFR's objectives are to promote stability of the Australian financial system and support effective and efficient regulation by Australia's financial regulatory agencies.

1.36 The CFR provided advice to Government in 2020 on measures to mitigate and address risks related to Australia's FMI (see CFR Advice).

1.37 The advice to Government highlighted deficiencies in the current regulatory framework for Australia's FMI. The report identified the need for stronger powers to enable regulators to monitor and manage certain risks, before they materialise, and highlighted the lack of an appropriate regime to ensure the continuity and stability of CS facilities in the event of a crisis.

1.38 The advice to Government made 16 recommendations for regulatory reform focused on:

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Introducing a resolution regime for licensed CS facilities, supported by a standing special appropriation and the establishment of a Resolution Authority.

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Strengthening the supervisory, licensing and enforcement powers of ASIC and the RBA in relation to FMI entities.

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Redistributing existing regulatory powers in the Act between ASIC, the RBA and the Minister.

1.39 The CFR consulted on these proposals in November 2019, following previous consultations on policy proposals in 2011 and 2015. Operators of FMI, market participants and industry associations provided feedback into the final recommendations.

1.40 On 14 December 2022, the Government announced it would deliver an FMI regulatory reform package consistent with the CFR's recommendations. The amendments in this Bill implement that package.

1.41 The amendments also support recommendations of the Financial System Inquiry and International Monetary Fund's Financial Sector Assessment Program. The amendments are also consistent with the international principles established by the Committee on Payments and Market Infrastructure and the International Organisation of Securities Commissions.

Summary of new law

1.42 Significant events such as the Global Financial Crisis and COVID-19 have highlighted not only the importance of CS facilities, but also the heightened risk they pose as they can concentrate and transmit financial risk with the potential to adversely impact the Australian economy.

1.43 Schedule 1 to the Bill introduces an FMI crisis management regime in accordance with recommendation 1 of the 2020 CFR advice to Government. This crisis management regime is explained in Chapter 1 of this explanatory memorandum.

1.44 The proposed resolution regime will provide resolution powers to the RBA to manage distressed CS facilities and support the continuity of CS facility services that are critical to the stability of the financial system.

1.45 In the event of a crisis, the RBA will be empowered to exercise certain powers to facilitate the resolution of a CS facility. A crisis is defined where certain conditions are met, broadly relating to:

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threats to CS facility viability or critical service continuity; or

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financial instability.

1.46 The RBA's powers to facilitate crisis management in a distressed CS facility include:

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giving directions to manage or respond to a crisis;

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taking control of distressed domestic CS facility licensees and, in some circumstances, related bodies corporate; and

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initiating the transfer of business or shares of a domestic CS facility licensee (and, in some circumstances, related bodies corporate) to a third party.

1.47 In exercising these powers, the RBA's primary objectives will be to maintain the overall stability of the financial system and provide for the continuity of CS facility services that are critical to the functioning of the financial system.

1.48 The RBA may only exercise these powers with respect to overseas licensees (who hold CS facility licence issued under subsection 824B(2) of the Act) where the RBA reasonably believes that an overseas regulator is exercising or intending to exercise powers to manage or respond to a crisis in their jurisdiction and the overseas regulator requests assistance.

Detailed explanation of new law

Overview of crisis management regime

1.49 The crisis management regime is contained in Part 7.3B of the Act. The objective of this Part is to provide for the efficient management and resolution of threats to CS facility licensees' ability to continue providing CS facility services, and/or threats to the stability of the financial system in Australia. The RBA's new powers can be exercised in circumstances where the RBA reasonably believes provision of CS facility services, critical to the functioning of Australia's financial system or where the failure of those services may jeopardise the stability of Australia's financial system, are failing or at risk of failure. [Schedule 1, item 14, section 830B of the Act]

1.50 The existing operating rules of a CS facility provide important transparency and predictability including with regard to default management and recovery arrangements. The resolution powers under Part 7.3B of the Act allow the RBA or statutory manager to continue to operate the CS facility according to these rules, including with respect to loss allocation, wherever doing so is consistent with the resolution objectives. In undertaking resolution the RBA can also consider the potential for contagion and flow on effects to the rest of the economy, the need to use public funds only as a last resort with appropriate recoupment, and in the case of overseas licensees the need to coordinate with the licensee's home regulator and exercise deference as appropriate.

1.51 To reflect the RBA's new crisis resolution powers under Part 7.3B of the Act, the functions of the RBA are updated to include Part 7.3B of the Act. [Schedule 1, items 46, 60, 61, and 62, paragraphs 5(1)(c) and 10B(1)(d), subsection 10(2) and paragraph 10B(3)(c) of the RB Act]

1.52 A simplified outline of key aspects of Part 7.3B of the Act is included in section 830A of the Act to assist readers of the Part. [Schedule 1, item 14, section 830A of the Act]

What resolution powers are available?

1.53 The RBA may need to use tools to take control of a body corporate in cases where it does not have confidence that the board and management are capable of resolving a crisis satisfactorily, or where the board and management are mismanaging the entity, including where it is insolvent or approaching insolvency.

1.54 When a condition for resolution has been met (see paragraphs 1.72 to 1.86), the RBA may access its resolution powers. The suite of powers to facilitate crisis resolution and resolve distressed bodies corporate include:

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appointing a statutory manager to the domestic CS facility licensee or a related body corporate;

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initiating the transfer of business or shares of a domestic CS facility licensee (and related bodies corporate) to a third party; and

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issuing directions.

1.55 Automatic statutory protections will apply when powers are exercised including stays on the exercise of certain contractual rights, such as rights where the right arises due to the fact a licensee is subject to an exercise of a resolution power, and moratoriums on the commencement of certain enforcement and litigation actions.

1.56 An exercise of any powers by the RBA would occur in the context of the object of Part 7.3B of the Act, which is to provide for the effective management and resolution of threats posed to:

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the stability of the financial system in Australia; and

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the continuity of CS facility services that are critical to the functioning of the financial system;

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that arise from, or in relation to, CS facility licensees.

[Schedule 1, item 14, section 830B of the Act]

1.57 The RBA also has regulatory powers that help it to mitigate the risk of financial crises developing. These 'non-crisis' powers are further explained in Chapter 2.

1.58 In certain circumstances, the RBA may use a subset of its resolution powers in respect of an overseas CS facility licensee, this is discussed in more detail in paragraphs 1.88 to 1.92.

Statutory management

1.59 When a condition for resolution has been met, the RBA can appoint itself or a third party as a statutory manager to a CS facility and its related bodies corporate in certain circumstances. Where a statutory manager is appointed to an entity, it has the powers of the board of directors and takes control of the entity. The RBA may need to use these powers to safeguard financial stability and ensure continuity of CS facility services that are critical to the functioning of the Australian financial system. [Schedule 1, item 14, Division 3 of Part 7.3B of the Act]

1.60 The appointment of a statutory manager can help stabilise a failing entity, so that steps can be taken to implement an orderly resolution in a way that protects the interests of participants and maintains financial system stability. Depending on the circumstances, this could include maintaining some or all of the entity as a going concern, facilitating the recapitalisation of the entity, or facilitating the transfer of some or all of the business to another entity.

1.61 The statutory management provisions are explained further in paragraphs 1.100 to 1.165.

Transfer

1.62 The compulsory transfer of shares and business powers are an important tool in the RBA's crisis resolution toolkit. The transfer powers enable some or all of the shares or business of a body corporate (including assets, liabilities, legal rights and obligations, data and systems) to be transferred to another consenting body corporate. [Schedule 1, item 14, Division 4 of the Act]

1.63 The transfer provisions are explained further in paragraphs 1.166 to 1.219.

Directions

1.64 Directions powers enable the RBA to compel a CS facility licensee and/or related bodies corporate to take, or refrain from taking, specific action to address issues of concern that have been identified. For example, directions powers may be used to limit further deterioration to the functioning of critical CS facility services in a period of emerging stress, and to facilitate the resolution of a distressed regulated entity. [Schedule 1, item 14, Division 5 of the Act]

1.65 Directions are intended to allow the RBA to respond to a crisis at a CS facility in a timely and decisive way.

1.66 Introducing a specific immunity provision for a body corporate, its directors and other officers when complying with a RBA direction will mitigate the risk of potential conflicts in obligations that may give rise to delay, or impede the effectiveness of the direction, particularly in a crisis. The directions power:

•

may require entities to take specified actions to facilitate resolution;

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may be used despite an external administrator being appointed;

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ensures that complying with an RBA direction will not be grounds for an entity, its directors or management to be held liable under any other law (subject to a good faith and reasonableness test); and

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provides for the RBA to determine that the giving of a direction should be confidential in certain circumstances.

1.67 The directions powers, as well as associated secrecy determinations and protections are explained at paragraphs 1.220 to 1.237.

Stays and moratorium provisions

1.68 An important aspect of the resolution regime is the operation of the stay and moratorium provisions. These provisions prevent counterparties of a body corporate from exercising certain contractual rights solely on the grounds that the RBA has exercised its powers (including directions, statutory management and transfer powers) in respect of the body corporate, a related body corporate or because of the body corporate or a related body corporate's financial position. This is important to ensure that actions by counterparties do not impede the ability for the RBA to implement an orderly resolution. [Schedule 1, item 14, Divisions 6 and 8 of the Act]

1.69 Corresponding stay provisions are required to ensure that the exercise of crisis powers by the RBA at a CS facility licensee does not give rise to termination or other legal rights in contracts of entities within the same group of bodies corporate (for example, a group comprising a CS facility licensee and its related bodies corporate) because the exercise of these rights against a related body corporate is likely to undermine the resolution of, or continuity of services by, the CS facility licensee. The stays are not intended to impede the ability of the CS facility participants to closeout their positions or otherwise manage their risk.

1.70 The protections in the PSN Act for the contracts and arrangements covered by that Act prevail over these stays and moratoria. The PSN Act ensures the effectiveness of approved RTGS payment systems, approved netting arrangements, close-out netting contracts and market netting contracts (all defined in section 5 of the PSN Act). The contracts and arrangements covered by the PSN Act can therefore be enforced according to their terms. Schedule 1 to the Bill amends the PSN Act to ensure the validity of relevant obligations and transactions subject to the PSN Act are preserved despite anything in new Part 7.3B of the Act. [Schedule 1, items 41, 42, and 43, definition of 'external administrator' and 'specified provisions' in section 5 and paragraphs 15C(1)(c) and 15D(1)(c) of the PSN Act]

1.71 The stays and moratorium provisions are explained further in paragraphs 1.266 to 1.326.

When can the resolution powers be used?

1.72 The RBA may only exercise a resolution power mentioned above in relation to a domestic CS facility licensee after at least one condition for resolution has been met. There are separate conditions to enact resolution powers for overseas licensees which is discussed in further detail from paragraphs 1.88 to 1.92.

1.73 A condition of resolution is met where:

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The RBA reasonably believes, in the absence of external support, the licensee is likely to be unable to continue to provide one or more CS facility services in a way that causes or promotes, or is critical to, the stability in the Australian financial system.

•

the licensee notifies the RBA its financial viability is or is likely to be at risk;

•

the RBA reasonably believes the licensee's financial viability is likely to be at risk;

•

an external administrator is intended to be appointed or has been appointed, or the licensee notifies the RBA that it is considering appointing an external administrator (the term external administrator has a modified definition in Part 7.3B of the Act to include receivers or managers to ensure all types of external support are captured – see paragraph 1.138); or

•

the RBA reasonably believes that a person is seeking to have an external administrator appointed. [Schedule 1, item 14, paragraphs 831A(1)(d), (e), (f), (g), (h) and (i) of the Act]

1.74 For the following resolution conditions to be met, the RBA must reasonably believe that the circumstances are likely to pose a threat to the stability of the Australian financial system or the ability of the licensee to continue to provide one or more CS facility services that are critical to the functioning of the financial system in Australia. Those circumstances are:

•

a domestic CS facility licensee requests the RBA's assistance;

•

a domestic CS facility licensee has contravened a direction from the RBA (these direction powers for the RBA are introduced in the amendments and are explained from paragraph 1.222)

•

the licensee notifies the RBA that the licensee has ceased or, in the absence of support, intends to cease or is likely to cease providing CS facility services;

•

a licensee is doing an act or thing, or omitting to do and act or thing; and

•

in relation to a related body corporate of the licensee, any of the following has occurred:

o

an external administrator has been appointed to the related body corporate, or a similar action in a foreign jurisdiction has occurred;

o

the related body corporate notifies the RBA it is considering appointing an external administrator;

o

the RBA reasonably believes a person is seeking to have an external administrator appointed to a related body corporate, or a similar circumstance is occurring in a foreign jurisdiction in relation to a related body corporate; or

o

the RBA reasonably believes the related body corporate is doing or not doing an act or thing, causing a threat to financial stability or the ability of the licensee to continue providing critical services.

[Schedule 1, item 14, paragraphs 831A(1)(a), (b), (c), (j), (k), (l) and (m) of the Act]

The facility requests resolution

1.75 The domestic CS facility licensee may request the RBA to exercise its powers under Part 7.3B of the Act. The RBA may take action if it reasonably believes an event relating to the licensee is likely to pose a threat to the stability of the financial system in Australia or the continuity of CS facility services that are critical to the functioning of the financial system in Australia. [Schedule 1, item 14, paragraph 831A(1)(a) of the Act]

1.76 This condition is designed to encourage a CS facility licensee to inform the RBA once it perceives a relevant risk or that its financial position is deteriorating to an extent that could threaten its viability or ability to provide CS facility services, and not to wait until the point of insolvency. The RBA does not have any obligation to commence resolution where a request is made, or to exercise a particular power in accordance with the request. In considering the request the RBA will have consideration to the two primary objectives underpinning any resolution action.

The facility contravenes a direction issued by the RBA

1.77 The RBA may exercise resolution powers where a domestic CS facility licensee contravenes a supervisory direction issued by the RBA. The RBA may take action if it reasonably believes the contravention is likely to pose a threat to the stability of the financial system in Australia or the continuity of critical CS facility services. [Schedule 1, item 14, paragraph 831A(1)(b) of the Act]

1.78 Only contraventions of supervisory directions issued by the RBA under sections 823E, 823F or 823G of the Act may enable the RBA to use its powers in relation to this condition. The provision does not extend to any directions issued by ASIC.

The facility faces a threat to service continuity or financial viability

1.79 The RBA may exercise resolution powers where there is a threat to the continuing provision of CS facility services in the absence of external support or the financial viability of a domestic CS facility is at risk. The RBA may determine that a domestic CS facility licensee requires external support due to the likelihood of critical services ceasing or the risk of becoming financially unviable. [Schedule 1, item 14, paragraphs 831A(1)(c), (d), (e) and (f) of the Act]

1.80 The RBA may also access resolution powers if the domestic CS facility notifies the RBA that:

•

the provision of critical CS facility services:

o

has ceased; or

o

is intended to cease or is likely to cease; or

o

is unable to be provided in the absence of external support;

•

financial viability of the CS facility:

o

is at risk; or

o

is likely to become at risk; or

o

in the absence of external support may become at risk.

1.81 A threat to financial viability arises where the licensee is no longer able to meet its obligations or is considered likely to be unable to meet its obligations in the near future. This could arise, for example, where there is a material risk to the security of the assets owned by the domestic CS facility licensee or a related body corporate of the CS facility licensee.

Appointment of external administrator

1.82 The appointment or likely appointment of an external administrator (for example, a liquidator or receiver) to a CS facility or a related body corporate, has the potential to trigger contagion impacts within the group that could lead to or exacerbate distress in the CS facility.

1.83 The appointment of an external administrator to a CS facility licensee, the licensee considering such an appointment, or the RBA reasonably believing the licensee is seeking to appoint an external administrator are all circumstances that satisfy a resolution condition. [Schedule 1, item 14, paragraphs 831A(g), (h) and (i) of the Act]

1.84 The appointment of an external administrator to a related body corporate of the licensee, the related body corporate considering such an appointment, or the RBA reasonably believing the related body corporate is seeking to appoint an external administrator can also satisfy a resolution condition. But these facts can only sustain a resolution condition if the RBA also reasonably believes that the appointment or anticipated appointment is likely to pose a threat to financial stability in Australia or the ability of the licensee to provide critical CS facility services. [Schedule 1, item 14, paragraphs 831A(j), (k) and (l) of the Act]

1.85 The inclusion of the appointment of an external administrator to a related body corporate of a CS facility licensee is necessary as such an appointment has the potential to adversely affect the financial continuity or orderly resolution of the relevant CS facilities. This is because there are likely to be intragroup linkages, for example, service or financial support agreements that, if terminated in the course of the external administration could negatively impact the viability and continuity of CS facility services.

Financial stability

1.86 The RBA may access resolution powers if the RBA reasonably believes that the domestic CS facility licensee or related body corporate is doing or omitting to do anything that interferes with the stability of the Australian financial system or the continuity of critical CS facility services, for example, including:

•

conducting affairs in a way that may cause or promote instability in the Australian financial system; or

•

being unable to continue to provide critical CS facility services without external support. [Schedule 1, item 14, paragraph 831A(1)(m) of the Act]

1.87 These conditions are, in some cases defined relatively broadly. More specific conditions may limit the RBA's ability to take effective action due to the difficulty in forecasting what circumstances may arise.

Recognising an overseas CS facility crisis

1.88 The crisis regime is intended to operate differently for overseas CS facility licensees compared to domestic CS facility licenses. Overseas CS facility licensees are licensees that have had their Australian CS facility licence granted under subsection 824B(2) of the Act. [Schedule 1, item 14, subsections 831A(3) and (4) of the Act]

1.89 The distinction aligns with the framework under Part 7.3 of the Act where overseas CS facility licensees are primarily regulated by their 'home' overseas regulator. Consistent with this approach, the home regulator will primarily be responsible for resolving a distressed body corporate. Division 8 of Part 7.3B of the Act provides the RBA with the power to support the home regulator's actions when requested.

1.90 Where a foreign regulator requests assistance or the RBA reasonably believes that the foreign regulator is considering exercising, or is exercising similar resolution powers, the RBA may make a notifiable instrument that recognises the circumstance in respect of an overseas CS facility licensee. The RBA may then exercise certain resolution powers in support of the home regulator's powers with respect to an overseas licensee with operations in Australia, as if the overseas CS facility licensee was a domestic CS facility licensee. [Schedule 1, item 14, subsection 847A(1), (2) and (5) of the Act]

1.91 However, the RBA may not appoint a statutory manager to an overseas CS facility licensee, conduct a transfer of shares, or wind up the overseas CS facility licensee. [Schedule 1, item 14, subsection 847A(6) of the Act]

1.92 The RBA may revoke an instrument recognising the foreign crisis if the overseas regulator terminates or withdraws its request or the RBA no longer reasonably believes the overseas regulator is intending to or is exercising resolution powers. [Schedule 1, item 14, subsection 847A(3) and (4) of the Act]

Winding up a body corporate

1.93 If a condition for resolution is met and the RBA considers that the body corporate is insolvent and could not be restored to solvency within a reasonable period, then the RBA may apply to the Court for an order that a body corporate be wound up. The application to be wound up can only be made in respect of a body corporate that is:

•

a CS facility licensee;

•

a related body corporate of the CS facility licensee that is incorporated in Australia; or

•

a related body corporate before a transfer of business or shares, and is still incorporated in Australia.

1.94 The RBA must inform ASIC as soon as practicable of the application for the body corporate to be wound up. [Schedule 1, items 5 and 14, the note under subsection 459P(1) and section 849AA of the Act]

Funding for crisis resolution

1.95 Where a crisis has materialised and the RBA decides resolution powers are required, funds are made available by the Commonwealth to support the RBA's activities in protecting the stability of the financial system in Australia.

1.96 The Treasurer, with the written approval of the Finance Minister, is permitted to activate a maximum appropriation of up to $5 billion per event to maintain the vital functions of a domestic CS facility during a crisis. An event occurs when at least one resolution condition has been triggered. This authorisation must specify the amount of funds, that does not exceed $5 billion per event, authorised to be drawn down from the appropriation. The initial appropriation may be less than the limit, with the Treasurer and Finance Minister being permitted to amend the appropriation amount to provide additional funds up to the maximum amount. [Schedule 1, item 14, subsections 846A(1), (2), (3) and (4) of the Act]

1.97 Funds designated for use in a CS facility resolution can only be used for the purposes of protecting the stability of the financial system in Australia or ensuring the service continuity of an Australian CS facility, critical to the functioning of Australia's financial system. Public funds for CS facility resolution are intended to be limited to situations where a CS facility's resources and recovery tools are insufficient to address losses, or the RBA considers the use of some recovery tools poses a threat to financial stability or otherwise compromises resolution objectives. It is expected that funds will be recovered after the crisis is resolved. Recovery mechanisms may be outlined in funding agreements. The provision of public funds is intended to be a last resort option, as preliminary tools available to regulators (such as the powers explained in Chapter 2) are expected to assist in crisis prevention. [Schedule 1, item 14, section 846B of the Act]

1.98 The authorisation cannot be revoked. The authorisation or amendment commences from the time it is made rather than when it is registered or specified on the instrument. Retrospective application in subsection 12(2) of the Legislation Act is not applicable to the authorisation as it will only be prospective. [Schedule 1, item 14, subsections 846A(5),(7) and (8) of the Act].

1.99 The authorisation is a legislative instrument but is not subject to disallowance under section 42 of the Legislation Act. The authorisation is not subject to sunsetting as specified in Part 4 of Chapter 3 of the Legislation Act. During a crisis event if funding is required to facilitate effective resolution, it is important that funding arrangements are provided with maximum certainty in order to be most effective. [Schedule 1, item 14, subsection 846A(6) of the Act]

Statutory management

1.100 The introduction of a statutory management regime empowers the RBA to appoint a statutory manager to take control of a distressed CS facility or related body corporate. Extending the power to related bodies corporate addresses potential interdependencies within the group, such as the provisions of critical CS services, that could otherwise impede effective resolution. The appointment of a statutory manager may be appropriate where the RBA reasonably believes other less invasive powers, such as directions would be ineffective.

Appointment of a statutory manager

1.101 The RBA has the power to appoint a statutory manager to a distressed CS facility or related bodies corporate to promote effective resolution. The RBA may only appoint a statutory manager if at least one of the conditions of resolution has been met. The RBA must reasonably believe that appointing a statutory manager to the body corporate is appropriate to respond to the resolution condition being satisfied in relation to the CS facility licensee. [Schedule 1, item 14, section 832A(1) of the Act]

1.102 The statutory manager appointed would either be the RBA (where it is in control) or an independent appointment by the RBA to control a CS facility or related body corporate. [Schedule 1, items 3 and 14, the definition of 'statutory manager' in section 9 and subsection 832A(2) of the Act]

1.103 If the RBA appoints a statutory manager to a related body corporate of a domestic CS facility licensee, a statutory manager must be, or about to be, simultaneously appointed to the domestic CS facility licensee. The RBA must consider that the appointment would facilitate resolution of the CS facility licensee. The statutory manager appointed to a related body corporate may be different to the one appointed to the domestic CS facility licensee. [Schedule 1, item 14, subsections 832A(3) and (4) of the Act]

1.104 The RBA must provide a body corporate with written notice of the intention to appoint a statutory manager. The body corporate is under statutory management at the time a statutory manager is in control of the body corporate's business which is either at future time specified on the notice or the time the notice is given. The appointment of a statutory manager cannot have a retrospective start date. [Schedule 1, items 3 and 14, the definition of 'statutory management' in section 9, subsections 832A(5) and 832C(1), (3) and (4) of the Act]

1.105 There is no specified duration for the term of statutory management. The appointment of a statutory manager will be terminated where the RBA considers it is no longer appropriate to continue the statutory appointment, such as, where there is no longer a threat to Australia's financial system stability or the continuity of CS facility services. The RBA must provide written notice to the statutory manager and body corporate that statutory management has ceased. [Schedule 1, item 14, subsections 832C(2), (3) and (4) and section 832B of the Act]

1.106 In the case of the RBA coming to a decision to replace a statutory manager, this does not result in the body corporate ceasing to be under statutory management. Instead, if a statutory manager is no longer in control because the RBA ceases its own appointment or the RBA terminates the appointment of an external statutory manager, there is no period where the body corporate ceases to be under statutory management. For example, if the RBA terminated the appointment of a statutory manager with a view to taking on the role of statutory manager itself or appointing a different statutory manager, there is no gap between termination of the previous statutory manager and appointment of the new statutory manager.

1.107 More than one statutory manager may be appointed, which can either be the RBA itself or an independent person. Where two or more statutory managers are appointed, the functions and powers of the statutory manager may be performed by either or all statutory managers acting jointly and severally, except to the extent otherwise specified under a notice from the RBA. [Schedule 1, item 14, section 836B of the Act]

1.108 Any instruments made in appointing, ending statutory management, terminating the appointment of a statutory manager or specifying limits or conditions on the statutory manager are not legislative instruments. [Schedule 1, item 14, subsection 832A(8) and 832B(7) of the Act]

Limits may be specified

1.109 At the time of appointment, the RBA may provide notice to the statutory managers specifying limits or conditions on any or all of the statutory managers' ability to perform functions and exercise powers jointly or individually. [Schedule 1, item 14, subsections 832A(6), and (7) of the Act]

PGPA Act not applicable under statutory management

1.110 The Public Governance, Performance and Accountability Act 2013 (PGPA Act) does not apply to a statutory manager in a crisis. Directors of a body corporate are not automatically removed at the time a statutory manager is appointed, but are unable to exercise any powers unless the RBA or statutory manager consents. Therefore, the RBA's influence or control in relation to the statutory management process does not result in the entity falling within the definition of a Commonwealth company in the PGPA Act and therefore there are no corporate governance and financial reporting obligations. [Schedule 1, item 14, subsection 832C(5) of the Act]

Powers and functions of a statutory manager

1.111 When a statutory manager is appointed to a domestic CS facility licensee it is in control of the business of the body corporate. It has the power to perform any function, and exercise any power, that the body corporate or any of its officers could perform or exercise if the body corporate were not under statutory management. In this capacity, when a statutory manager performs a function or exercises a power, it is taken to be acting as the body corporate's agent.

1.112 The statutory manager may:

•

exercise powers under the operating rules;

•

remove a director of the body corporate;

•

appoint a person as a director of the body corporate (regardless of whether it is fulfilling a vacancy);

•

execute a document, bring or defend proceedings;

•

control the body corporate's business, property and affairs;

•

alter the body corporate's constitution or other arrangements for governance; or

•

do anything else, in the name of the body corporate and on its behalf for the purposes of resolving a crisis. [Schedule 1, item 14, subsections 833A(1) and (2) and sections 833B, 833C, and 833F of the Act]

1.113 The statutory manager may only dispose of business or property at the direction of the RBA or with the RBA's consent. [Schedule 1, item 14, subsection 833A(1)(c) of the Act]

1.114 However, the statutory manager must follow certain procedures before taking action to alter the body corporate's constitution or governance arrangements, recapitalise the body corporate or effect a transfer of shares in the body corporate. [Schedule 1, item 14, subsection 833A(3) of the Act]

1.115 The statutory manager may only alter the body corporate's constitution or other governance arrangements if it considers it is reasonably necessary for facilitating the performance of the statutory manager's functions and duties, or the exercise of powers. Altering the body corporate's constitution does not allow the statutory manager to initiate a transfer of the body corporate's shares or business other than in accordance with Division 4 of Part 7.3B of the Act. [Schedule 1, item 14, subsections 833C(1) and (2) of the Act]

1.116 These powers are intended to override any restrictions that are present in the Act, the body corporate's constitution, any contracts, agreements or arrangements to which the body corporate is a party, and any listing rules of a financial market on which the body corporate is listed. [Schedule 1, item 14, subsection 833C(3) of the Act]

Requests for information and assistance

1.117 For effective resolution of a body corporate the RBA must have access to critical information about the operations of domestic CS facilities. The RBA may need information that relates to services provided by, and arrangements of, other group entities on which the operation of the CS facility services rely, or which could potentially affect the domestic CS facility licensee.

1.118 At the written request of a statutory manager, past and current officers of the domestic CS facility licensee or related body corporate must provide any information relating to the business of the body corporate. A past officer will only be required to comply with the request if they were an officer of a body corporate in the three years prior to the time the body corporate came under statutory management. A requirement to give information may include a requirement to produce books, accounts, documents or the location of information. [Schedule 1, item 14, subsections 833E(1), (2) and (3) of the Act]

1.119 The statutory manager may pass on any information to the RBA that it receives under its power to request information. The secrecy provision in section 79A of the RB Act applies to information and documents the RBA obtained as a statutory manager. [Schedule 1, items 14, 47, 51 and 52, subsection 833E(5) of the Act and subsections 79A(1) and (4) of the RB Act]

1.120 A person that fails to deliver all information relevant to the body corporate to the statutory manager is liable to a criminal offence of 12 months imprisonment or 60 penalty units, or both. [Schedule 1, items 14 and 23, subsection 833E(4) and Schedule 3 of the Act]

Recapitalisation

1.121 The recapitalisation of an institution is an internationally recognised method of addressing a distressed institution and restoring the institution's financial health. The recapitalisation powers are intended to be strong and flexible to allow a statutory manager to respond quickly and decisively to a range of circumstances. Given the high level of intervention recapitalisation represents, the statutory manager's powers to facilitate recapitalisation can only be enforced at the direction of the RBA or with the RBA's consent.

1.122 Recapitalisation is when a body corporate acts to:

•

issue, cancel or sell shares, or rights to acquire shares;

•

reduce share capital by cancelling any paid-up share capital that is not represented by available assets;

•

vary or cancel rights or restrictions attached to shares in a class of shares in the body corporate. [Schedule 1, item 24, section 9 of the Act]

1.123 A statutory manager may take a recapitalisation action with respect to a body corporate at the direction of or with the consent of the RBA. [Schedule 1, item 14, subsection 833D(1) of the Act]

1.124 An expert report on the fair value for each of the shares and rights, or the fair value of the rights affected must be obtained prior to the recapitalisation action (see paragraphs 1.127 to 1.129). [Schedule 1, item 14, the note in subsection 833A(1) and subparagraph 849CB(1)(a)(i) and subsection 849CB(2) of the Act]

1.125 As soon as practicable after the statutory manager takes a recapitalisation action with respect to the body corporate, the statutory manager must provide a written notice to members of the body corporate. That notice must state the action and the effects of the action with respect to the member's interests. A failure to provide this notice does not impact the validity of the recapitalisation action. This is to ensure the continuity of CS facility services and ensure that a technical failure in the acquisition of an expert report does not invalidate recapitalisation activities that may be crucial to broader financial stability. [Schedule 1, item 14, subsections 833D(2), (3) and 849CB(6) of the Act]

1.126 The power of a statutory manager to take an action to recapitalise a body corporate in the way described above is intended to override any restrictions that are present in the Act, the body corporate's constitution, any contracts, agreements or arrangements to which the body corporate is a party. It is also intended to override any operating rules or procedures of a licensed CS facility of which the body corporate is the licensee, and any listing rules of a financial market on which the body corporate is listed. However, the statutory manager cannot use its power to recapitalise to effect a transfer of all or part of the shares in the body corporate – the statutory manager must only do that in accordance with the transfer powers under Division 4 of Part 7.3B of the Act (see paragraph 1.166). [Schedule 1, item 14, subsections 833D(4) and (5) of the Act]

1.127 Prior to undertaking an action to recapitalise the CS facility, the statutory manager or the RBA, must obtain an independent valuation report which sets out the expert's opinion of the fair value for each of the shares and rights, or the fair value of the rights affected. The expert responsible for the report must not be an associate of the body corporate or the statutory manager. The statutory manager or the RBA are required to consider the report, and may draw on its content, but are not compelled to follow the recommendations of the report when determining the terms of a recapitalisation action. [Schedule 1, item 14, subsection 849CB(1), (2) and (3) of the Act]

1.128 The RBA may determine in writing that a statutory manager is not required to obtain a report if it is satisfied that the delay in obtaining the report would detrimentally affect either financial system stability in Australia or the continuity of CS facility services. [Schedule 1, item 14, subsection 849CB(5) of the Act]

1.129 The RBA may publish details of the report on its website. Publication of the determination may occur when the RBA considers it is appropriate, such as after the relevant secrecy notices have ceased to apply. [Schedule 1, item 14, subsection 849CB(4) of the Act]

1.130 As an example of a recapitalisation act, a statutory manager may facilitate a capital injection into a CS facility by issuing new shares and selling them to a new investor. Under this example the new investor would gain a stake in the company and pre-existing shareholders would have their stake in the company diluted but would retain their shares in the company.

Effects of statutory management on the body corporate

1.131 At the time a statutory manager is appointed to a body corporate, directors of that body corporate are not automatically removed from office. However, directors are prohibited from performing or exercising their functions and powers as directors without the written approval of the statutory manager or the RBA.

1.132 A director that purports to perform or exercise a function or power of a director commits an offence with a penalty of 30 penalty units.

1.133 If the statutory manager provides approval, the statutory manager must immediately notify the RBA, and the RBA has discretion to vary or revoke the approval. Any unapproved exercise of power is void. [Schedule 1, items 14 and 23, subsections 834A(1), (2), (3), (4), (5) and (7) and Schedule 3 to the Act]

1.134 Where a director's actions in accordance with a written consent conflict with a function or power of the statutory manager, the statutory manager's function or power prevails. [Schedule 1, item 14, subsection 834A(6) of the Act]

1.135 Secured creditors will have limited rights to realise or otherwise deal with their security interest. These rights will be constrained by the Act and the specific circumstances. [Schedule 1, item 14, subsection 834A(8) of the Act]

Body corporate under external administration

1.136 If a statutory manager is appointed to a body corporate that is under external administration, the external administrator's appointment is terminated at the time the statutory manager takes control of the body corporate. Any subsequent actions or purported actions by the external administrator in relation to the body corporate's business, property and affairs after the termination are invalid and of no effect. [Schedule 1, item 14, subsections 836A(1) and (4) of the Act]

1.137 The RBA must provide written notice of the statutory management appointment to the external administrator, however, a failure to provide notice does not invalidate the appointment of the statutory manager. Throughout the duration of statutory management, an external administrator can only be appointed if the RBA consents. [Schedule 1, item 14, paragraph 832A(5)(b) and subsections 836A(2) and (3) of the Act]

1.138 The amendments introduce a definition of external administrator into section 9 of the Act that adopts the meaning giving in Schedule 2 to the Act. That definition is modified for Part 7.3B of the Act to extend to receivers, managers and managing controllers. The new external administrator definition for Part 7.3B of the Act does not cover Chapter 5 of the Act, this is to preserve the meaning the term had in respect of the chapter prior to the commencement of the amendments in the Bill. A reference in Chapter 2D of the Act to the definition in Schedule 2 to the Act that is now covered by the section 9 definition is repealed. [Schedule 1, items 1 and 4, the definition of 'external administrator' in section 9 and subsection 198G(9) of the Act]

Annual general meeting

1.139 There is no obligation to continue to hold annual general meetings under section 250N or 601BR of the Act whilst the body corporate is under statutory management. The annual meetings may resume once statutory management concludes. [Schedule 1, item 14, section 836D of the Act]

Transfer or alteration effect on members

1.140 Any transfer of shares or alteration in the status of members of a company is void except with either the written consent of the RBA or statutory manager. Further, only the statutory manager is permitted to deal with a transfer or alteration in the status of the members.

1.141 If the RBA or statutory manager's written consent is conditional, those conditions must be met before the transfer or alteration can take effect. A transfer or alteration is not void if done pursuant to a recapitalisation action under section 833D of the Act or to give effect to a compulsory transfer of shares under Division 4 of Part 7.3B of the Act. [Schedule 1, item 14, subsections 834C(1) and (2) of the Act]

1.142 Before any alteration of status that is made during statutory management, the statutory manager must notify all persons that were members of the body corporate before the alteration. The notice must identify the alteration and explain to members how their interests are affected by the alteration.

1.143 A subsequent failure by the statutory manager to give that notice after the alteration has occurred does not affect the validity of the alteration. This is to clarify that an actual or alleged technical failure to provide a notice to members does not cast doubt on the validity of the alteration. [Schedule 1, item 14, subsections 834C(3) and (4) of the Act]

Dealing with interests in property

1.144 A statutory manager may deal with the secured property of a body corporate in any way the body corporate could deal with the secured property subject to certain conditions. The statutory manager may deal with the secured property as if it had the original character, where the secured property may be treated as:

•

a circulating asset – if the PPSA security interest had stopped being a circulating asset; or

•

a floating charge – if the security interest was a floating charge when it arose and has become a fixed or specific charge. [Schedule 1, item 14, section 836E of the Act]

1.145 To safeguard the interests of creditors whose rights have been suspended from the operation of stay provisions, limits are introduced to prevent the statutory manager from disposing of the property that provides the security. The safeguard will be extended to prevent disposal of property owned or leased by another and operated by the body corporate. [Schedule 1, item 14, subsection 836F(1) of the Act]

1.146 There are three exceptions that allow for disposal of property that is subject to a security interest under statutory management which extinguishes the security interest, including:

•

disposing of property where this is done in the ordinary course of the body corporate's business;

•

the secured party, owner or lessor consents to the disposal; or

•

the RBA consents or directs the disposal of property. [Schedule 1, item 14, subsections 836F(2) and (3) of the Act]

1.147 A disposal of property may be considered in the ordinary course of business despite the owner demanding the return of property, subject to the following conditions:

•

the property is used or occupied, or in the possession of a body corporate; and

•

another person is the owner of the property; and

•

the property is either a PPSA retention of title property or subject to a retention of title clause under a contract. [Schedule 1, item 14, subsection 836F(4) of the Act]

Proceeds of sale of property

1.148 The amendments include specific procedures for the net sale proceeds of a property a statutory manager disposes of by sale if a body corporate is under statutory management.

1.149 In the event there is excess proceeds from the sale of property, the statutory manager must set aside the net proceeds to pay any debts secured by the possessory security interest and any other security interest in the property with a priority interest. [Schedule 1, item 14, paragraphs 836G(1)(a), (b), (c) and (d) of the Act]

1.150 Where there is a shortfall from the sale of property, debts must be paid in the order of priority, and where there are outstanding debts the amount of debt that remains unpaid can be recovered from the body corporate as an unsecured debt. [Schedule 1, item 14, paragraph 836G(1)(e) of the Act]

1.151 The same process of determining excess or shortfall is used when a statutory manager sells property that is subject to a retention of title clause under the contract. [Schedule 1, item 14, subsection 836G(3) of the Act]

1.152 Contrastingly, for the disposal of property that is a PPSA retention of title property, the statutory manager must instead apply the net proceeds of the sale in the same way as a secured party is required to under the PPSA. This involves applying an amount, personal property or proceeds of collateral received by the secured party as a result of enforcing a security interest in the property. [Schedule 1, item 14, subsection 836G(2) of the Act]

Statutory manager obligations

1.153 The RBA will have oversight of any powers exercised by the statutory manager. To assist in this oversight, the statutory manager must:

•

report to the RBA;

•

comply with any directions issued by the RBA; and

•

notify the RBA of any actions that may affect financial stability.

1.154 When the RBA requests, a statutory manager must give a written report to the RBA, within a reasonable time, showing how the control of the body corporate's business, property and affairs is being carried out. Similarly, where statutory management is terminated, a written report must be provided to the RBA outlining how the business was carried out over the period of statutory management. That report is to be provided without a request from the RBA and is part of the process when statutory management ends. [Schedule 1, item 14, section 835A of the Act]

1.155 The RBA may direct a statutory manager to take a specified action relating to the business, property or affairs of the body corporate to which it is appointed. [Schedule 1, item 14, subsection 835B(1) of the Act]

1.156 The statutory manager must comply with the direction or varied direction issued by the RBA. Alternatively, the statutory manager may immediately request the direction to be altered and provide supporting information justifying the request. Where the RBA declines the statutory manager's request, the statutory manager must comply with the original direction. [Schedule 1, item 14, subsections 835B(2) and (3) of the Act]

1.157 In general, the statutory manager may take actions to resolve a distressed body corporate. However, where an action may threaten Australia's financial system stability or the continuity of critical CS services, the statutory manager must notify the RBA and obtain written approval to complete the action. The RBA may subsequently provide written notification of the consent. An action by the statutory manager is not invalidated by a failure to comply with this requirement. The RBA can however terminate the appointment of the statutory manager if it fails to comply with any reporting or notification requirement under Part 7.3B of the Act. [Schedule 1, item 14, section 835C of the Act]

Legal protections

1.158 Whilst a body corporate is under statutory management, qualified privilege is afforded to statutory managers when exercising any powers, functions, or duties, except where these actions or omissions are not in good faith. [Schedule 1, item 14, section 836J of the Act]

1.159 However, consistent with section 1316A of the Act, the privilege against self-incrimination is not available to bodies corporate.

1.160 Where the statutory manager of a body corporate makes a payment, or enters into a transaction or does any other thing in good faith or with the consent of the RBA, that action is valid and is not liable to be set aside in a winding up of the body corporate. [Schedule 1, item 14, section 834B of the Act]

1.161 The ASIC Act states that disclosing information to the RBA is authorised use and disclosure of otherwise confidential or protected information. However, this authorisation of disclosure to the RBA by itself does not automatically authorise disclosure to a statutory manager.

1.162 The amendments ensure that disclosure of information to a statutory manager of a body corporate is an authorised use and disclosure of information. [Schedule 1, item 35, paragraph 127(2A)(da) of the ASIC Act]

Protections for a person dealing with a statutory manager

1.163 Persons dealing with the statutory manager will be entitled to make the same kinds of assumptions about the authority of persons to act, as if the statutory manager was the officer of the company. This includes assumptions about compliance with the company's internal management procedures as such persons are entitled to make in dealing with other company officers. [Schedule 1, item 14, section 836K of the Act]

Costs of statutory management

1.164 The costs incurred by the RBA in appointing a statutory manager to a body corporate are payable from the body corporate's funds and are a debt due to the RBA.

1.165 These costs include remuneration and expenses of a statutory manager, regardless of whether the RBA and/or another person is the statutory manager. Debts due to the RBA as a result of the costs of statutory management have priority in a winding-up of the body corporate over all other unsecured debts. [Schedule 1, item 14, section 836C of the Act]

Transfer

1.166 Compulsory transfer of shares and business is an important tool in the package of resolution options available to the RBA. This power enables the RBA to transfer a failing or insolvent CS facility to a solvent body corporate to continue providing critical CS services.

1.167 Once a condition for resolution has been met, the RBA has discretion to issue a transfer determination for a transfer of shares or business of the CS facility licensee, and related bodies corporate. Given the degree of intervention in transferring a business or shares, this power is exclusively available to the RBA. An appointed statutory manager cannot authorise a transfer, but may facilitate the transfer, at the direction of the RBA.

Compulsory transfer

1.168 The amendments enable some or all of the shares or business of a CS facility licensee or a related body corporate (including assets, liabilities, legal rights and obligations, data and systems) to be transferred to another body corporate or a newly established bridge entity that is incorporated in Australia.

1.169 In general, the process for a transfer of shares or business from one entity to another is for the RBA to obtain consent from the appropriate parties, issue a determination outlining a transfer will take effect, and finally issue a certificate of transfer stating the transfer is to occur.

Transferring shares or business of a related body corporate

1.170 The RBA may determine that a transfer of shares, of part or all of the business of a related body corporate is reasonably appropriate when a domestic CS facility licensee is being, or has been, transferred. This includes a body corporate that was a related body corporate immediately prior to the transfer of the domestic CS facility licensee. [Schedule 1, item 14, subsections 837A(2) and 837B(2) of the Act]

1.171 For the transfer of shares or business of the related body corporate of a domestic CS facility licensee the target body must be incorporated in Australia. [Schedule 1, item 14, paragraphs 837A(2)(d) and 837B(2)(d) of the Act]

1.172 Discretion to transfer a related body corporate is based on the RBA's assessment that it is required to facilitate the CS facility's resolution, including to enable the conduct of default management actions, restore or maintain financial stability or anything else that the RBA considers is necessary for the CS facility's resolution. For example, the RBA may consider it necessary to transfer the business or shares of related bodies corporate of a domestic CS facility licensee, where a related body corporate:

•

supplies services or funding that are necessary for the domestic CS facility licensee to operate its CS facility services, and access to those services could not be guaranteed unless the related body corporate is transferred with the domestic CS facility licensee; or

•

operates a market for which the domestic CS facility licensee provides CS facility services and the operation of this market is required to effectively conduct default management actions that are necessary for resolution.

Transfer determination

1.173 Regardless of whether the RBA makes a transfer of shares or a transfer of business, there are certain requirements that must be satisfied. The written transfer determination sets out how a transfer is to take effect for either a domestic CS facility licensee or a related body corporate. Prior to making the determination the RBA must:

•

obtain the Minister's consent to the transfer;

•

reasonably believe the transfer to the receiving body is appropriate to manage or respond to a condition being satisfied in relation to the licensee;

•

be satisfied that the target body is incorporated in Australia; and

•

be satisfied that the board of directors of the receiving body has consented to the transfer (where the consent remains in force until it is withdrawn by the board of directors with the RBA's agreement). [Schedule 1, item 14, subsections 837A(1) and (2), and 837B(1) and (2), (6) of the Act]

1.174 A transfer determination must include the particulars of the transfer including:

•

the names of the target body and the receiving body;

•

a statement of reasons why the transfer is made;

•

whether it will be a total transfer or a partial transfer; and

•

in the case of a partial transfer, an identification of the part of the target body's business or shares to be transferred. [Schedule 1, item 14, subsections 837A(3)and 837B(3) of the Act]

1.175 A copy of the transfer determination must be provided to the target body and receiving body. Given the time critical nature of the transfer, the determination is not a legislative instrument. [Schedule 1, item 14, subsections 837A(4) and (5) and 837B(4) and (5) of the Act]

1.176 The consent of the board of directors of the receiving body to receive the transfer of shares or business continues to have effect until the consent is withdrawn and the RBA agrees to the withdrawal having regard to any of the following:

•

circumstances that have arisen since the consent was given;

•

circumstances that were in existence at or before the time when the consent was given but which were not known to the receiving body's board when it gave its consent; or

•

any other relevant matter. [Schedule 1, item 14, section 837C of the Act]

Transfer determination conditions

1.177 The determination may impose conditions that the target body or receiving body must comply with either before or after the certificate of transfer is issued. [Schedule 1, item 14, subsection 837E(1) of the Act]

1.178 The RBA, either on its own volition or at the request of the target or receiving body, may vary or revoke a condition. The RBA is not obliged to comply with the request. However, where the RBA varies or revokes a condition, written notice must be provided to each affected entity so that all entities are aware of the conditions. [Schedule 1, item 14, subsection 837E(2), (3) and (4) of the Act]

1.179 The body corporate must comply with the conditions imposed on the determination if there is no certificate of transfer in force and a subsequent determination that a transfer is not to take effect is not issued.

1.180 If the body corporate fails to comply with conditions outlined in the determination, a penalty of 200 penalty units applies. This is consistent with a similar provision in section 31 of the Financial Sector (Transfer and Restructure Act) 1999. The penalty provides for a strong deterrence effect as a breach of conditions outlined in a determination may have significant impacts on or impede resolution, putting financial system stability at risk. [Schedule 1, items 14 and 23, subsection 837E(5) and Schedule 3 to the Act]

1.181 A protection is included for the body corporate that by complying with a condition of a transfer determination, that body corporate will not commit an offence under the Act. The body corporate would bear an evidential burden. [Schedule 1, item 14, subsection 837E(6) of the Act]

1.182 Similar to obtaining an expert report for a recapitalisation act, the RBA should obtain an independent expert valuation of property prior to making a transfer determination. However, the RBA is not required to do this if obtaining the valuation would threaten the stability of Australia's financial system or continuity of CS services. Obtaining the expert report is subject to the same conditions outlined from paragraph 1.127. [Schedule 1, item 14, section 849CB of the Act]

Transfer agreement

1.183 After a determination is made about a compulsory transfer of a business or body corporate or shares in a business or body corporate, the receiving or target body has the opportunity to write to the RBA to specify the mechanism for how the shares or assets and liabilities of the business are to be transferred. The RBA may approve this statement in writing before the certificate of transfer is issued if the mechanism is appropriate and both parties agree to the statement. [Schedule 1, item 14, section 837D of the Act]

Determination that transfer is not to take effect

1.184 If after issuing a transfer determination, but prior to issuing a certificate of transfer, the board of the receiving body withdraws their consent or the RBA no longer reasonably believes the transfer should occur, then the RBA must issue a certificate stating that a transfer is not to take effect. [Schedule 1, item 14, subsection 837F(1) of the Act]

1.185 The RBA may decide that a transfer is not required if it is no longer appropriate to facilitate resolution or the condition of resolution that was previously satisfied no longer poses a threat to the stability of the financial system in Australia. [Schedule 1, item 14, subsection 837F(2) of the Act]

1.186 Copies of a certificate that a transfer is not to occur must be provided to all relevant bodies corporate. The certificate is not a legislative instrument. [Schedule 1, item 14, subsection 837F(3) and (4) of the Act]

Information to the receiving body

1.187 The RBA may provide general and/or confidential information to a prospective receiving body about the business or shares that are or may be transferred in connection with a determination or possible determination of a transfer or proposed transfer. The RBA may impose conditions on the information that a body corporate must comply with. Disclosure of confidential or personal information to the receiving body is necessary and appropriate to fulfill the objective of stabilising Australia's financial system. [Schedule 1, item 14, section 839B of the Act]

Certificate of transfer

1.188 Where the RBA reasonably believes that a transfer of business or shares should proceed after a transfer determination is issued, then the RBA must issue a certificate of transfer stating that the transfer is to take effect provided that the consent of the receiving body has not been withdrawn. [Schedule 1, item 14, subsection 838A(1) of the Act]

1.189 The certificate of transfer must include:

•

the names of the target body and the receiving body;

•

the date the certificate of transfer is to come into force;

•

whether the transfer is a total or partial transfer of business or shares;

•

the shares that are being transferred, in the case of a part transfer of shares; and

•

a list of the assets and liabilities of the target body that are being transferred, in the case of a partial transfer of business. [Schedule 1, item 14, subsection 838A(2) of the Act]

1.190 It is at the discretion of the RBA to specify the mechanism for determining the other things that are to happen in relation to the:

•

assets and liabilities that are to be transferred; or

•

shares that are to be transferred. [Schedule 1, item 14, subsection 838A(5) of the Act]

Notice of certificate

1.191 The certificate of transfer has effect from the day specified on the notice. The RBA must give a copy of the certificate of transfer to the target body and the receiving body and publish the certificate on the RBA website. The certificate is not a legislative instrument. [Schedule 1, item 14, subsections 838A(3), (4), and (6) of the Act]

1.192 Any document that purports to be a certificate under this Division is taken to be a certificate and properly given. [Schedule 1, item 14, section 839E of the Act]

1.193 Land or assets may be lodged on a register and become the property of the receiving body subject to the RBA issuing an enabling certificate in relation to land, interests in land and other assets to be dealt with, and given effect to, in certain circumstances. [Schedule 1, item 14, sections 839C and 839D of the Act]

Time and effect of compulsory transfer of shares or business

1.194 A compulsory transfer may take effect without the approval of licensees, their shareholders, market participants, or contract holders.

1.195 In relation to a transfer of business, when the certificate of transfer comes into force, the receiving body becomes the successor in law of the target body to the extent of transfer:

•

for a total transfer – all assets and liabilities of the target body, wherever those assets and liabilities are located, become assets and liabilities of the receiving body without any transfer, conveyance or assignment; and

•

for a partial transfer – only the assets and liabilities of the target body listed in the certificate of transfer, wherever located, become assets and liabilities of the receiving body without any transfer, conveyance or assignment; and

•

to the extent of the transfer, the duties, obligations, immunities, rights and privileges applying to the target body apply to the receiving body. [Schedule 1, item 14, subsections 838C(1) and (2) of the Act]

1.196 The effect of a transfer of shares is that all shares become shares held by the receiving body without any transfer, conveyance, or assignment. The shares become shares held by the receiving body free from any trust, liability, or other encumbrance. [Schedule 1, item 14, subsections 838B(1) and (2) of the Act]

1.197 At the time of the transfer, the specified things that are included in a certificate of transfer for business or for shares (as appropriate) are taken to occur. Similarly, where a transfer agreement specifying the mechanism for certain things was approved by the RBA, then those things are taken to have happened at the time of the transfer. [Schedule 1, item 14, subsections 838B(3) and (4) and 838C(3) of the Act]

Effect of transfer

1.198 At the time a certificate of transfer comes into force, the receiving body is substituted for the target body in any instrument in relation to:

•

any asset or liability transferred; or

•

a share in the target body transferred. [Schedule 1, item 14, section 839F of the Act]

1.199 Further, from when the certificate of transfer is in force the target body must:

•

promptly account to the receiving body for any income or other distribution received if the income or distribution arises from assets transferred under Part 7.3B of the Act; and

•

at the request of the receiving company, give the receiving body access to all of the books in its possession that relate to assets or liabilities transferred. [Schedule 1, item 14, sections 839G and 839H of the Act]

1.200 Consistent with other provisions throughout the Act, failure to comply with the above requirements is an offence with a penalty of 12 months imprisonment. [Schedule 1, item 23, Schedule 3 to the Act]

1.201 The operation of the trust will not be affected where a trustee or beneficiary of a trust is transferred.

Effect of partial transfer on contracts

1.202 A transfer of business of a body corporate is a partial transfer if it relates to some, but not all, of the target body's business. In CS facility resolution, this would be expected to be applied to separable business lines/financial products or to particular assets and liabilities, subject to the voidance conditions below.

1.203 The partial transfer will be void where the following apply to a body corporate:

•

just prior to the partial transfer the target body is a party to a close-out netting contract, market netting contract or approved netting arrangement in respect of an obligation of the target body under the contract or arrangement (consistent with the PSN Act); and

•

the assets and liabilities covered by the transfer certificate includes some assets and liabilities the body has under the close-out netting contract, market netting contract, or approved netting arrangement, or assets that are property over which security is given in respect of an obligation of the target body under the close-out netting contract or market netting contract. [Schedule 1, item 14, subsection 839A(1) of the Act]

1.204 The partial transfer is void only:

•

to the extent of the assets or liabilities of the target body under any of those contracts with respect to the counterparty; and

•

if security is given over financial property in respect of an obligation of the target body under a close-out netting contract – to the extent that the assets are financial property in the possession or control of the counterparty (or another person on its behalf); and

•

if security is given over property in respect of an obligation of the target body under a market netting contract – to the extent that the assets are that property. [Schedule 1, item 14, section 839A(2) of the Act]

Minister's power to grant a CS licence to a receiving body

1.205 The Minister has the power to issue a domestic CS facility licence to the receiving body that is transferred all or some of the target body's business. The licensing power for the Minister to grant a CS facility licence on an expedited basis is integral to the functioning of Australia's financial system. The domestic CS facility licence may be subject to licence conditions, including conditions to reflect the expedited nature of the licence approval process. [Schedule 1, item 13, subsections 824B(3) and (4) of the Act]

1.206 A licence granted in this way is, once granted, taken to have been granted by ASIC in the usual way and is subject to the relevant regulatory powers of ASIC and the RBA.

Bridge entity

1.207 Where a receiving body does not consent or an alternative receiving body is unable to be found, the RBA may establish a temporary 'bridge' institution to take over and continue operating certain critical functions of the CS facility or related body corporate for a period, without incurring liability for any legacy claims.

1.208 Transfer to a bridge entity allows the Commonwealth to take ownership of the business or shares of a domestic CS facility licensee in resolution. A similar model exists under the crisis resolution powers afforded to APRA for ADIs. The power to create a wholly-owned Commonwealth company is authorised by section 85 of the PGPA Act.

Function and purpose of a bridge entity

1.209 The use of a temporary bridge institution would support continuity of CS facility services and financial stability. While the RBA may seek to wind down the business of the bridge institution, this would only occur if a transfer or sale was not possible within a reasonable timeframe and if to do so would be consistent with the objectives of the RBA. Given that the bridge arrangement is temporary, the RBA must complete an exit arrangement as soon as reasonably possible.

1.210 The RBA will establish terms and conditions under which the bridge entity will operate, including:

•

its ownership structure;

•

the source of its capital;

•

operational financing and liquidity support;

•

the applicable regulatory requirements, including compliance with licence conditions and the Financial Stability Standard;

•

the applicable corporate governance framework; and

•

the process for appointing the directors of the bridge institution and its mandate.

1.211 The RBA may also arrange the sale or wind-down of the bridge institution, or the sale or onward transfer of some or all of its assets and liabilities to a third-party, subject to the objectives of resolution.

Legal protections for transfer

1.212 A transfer done in accordance with the amendments generally has effect despite any other law, contract, deed, undertaking, agreement or other instrument.

1.213 Actions taken under the transfer provisions cannot cause the receiving body, the target body or any other person to be in breach of any contract, civil wrong or any law of the Commonwealth or a State or Territory or in any contract, deed, undertaking, agreement or other instrument. These overrides are intended to ensure timely action to address financial stability risks.

1.214 However, the provisions of the operation of the Privacy Act 1988, the Fair Work Act 2009, the Fair Work (Registered Organisations) Act 2009, and the Fair Work (Transitional Provisions and Consequential Amendments) Act 2009 are not limited by the transfer powers. This arrangement is consistent with the Transfer Act. [Schedule 1, item 14, section 839J of the Act]

Compensation

1.215 The crisis regime includes arrangements for the acquisition of property so that it is not invalid under the Constitution. If the operation of the RBA's powers would result in the acquisition of property on other than just terms and would be invalid because of paragraph 51(xxxi) of the Constitution, then the person is entitled to reasonable compensation. If the Commonwealth and the person do not agree on the amount of compensation, the person may apply to the Court, where the Court will determine the amount. [Schedule 1, item 14, section 849CE of the Act]

1.216 The purpose of having explicit compensation arrangements built in is to facilitate the RBA effectively executing any powers involving the acquisition of property and avoid delays resulting from a challenge to the constitutional validity of the RBA's actions.

Power to make rules

1.217 The RBA may, by legislative instrument, make rules in relation to transferring the shares or business of a body corporate which may include:

•

the purchase price and payment of shares;

•

dispute resolution;

•

publication of information;

•

freeing of shares from any trust or other encumbrance; or

•

any other incidental matter to the transfer of shares or business. [Schedule 1, item 14, section 839K of the Act]

1.218 A person must comply with any rules the RBA makes in relation to a transfer. A failure to comply with the rules that apply to a person is an offence of 30 penalty units. [Schedule 1, items 14 and 23, subsection 839K(3) and Schedule 3 of the Act]

1.219 The ability for the RBA to make rules in respect of a transfer of shares or business reflects the need for flexibility whilst in a crisis. Given the RBA will be dealing with the bodies corporate directly, the RBA will have the most relevant and timely information to make rules that supplement the transfer process.

Directions during resolution

1.220 Resolution directions may be issued by the RBA after a condition for resolution has been met. A direction issued during a crisis may require domestic CS facility licensees, and, in certain circumstances, related bodies corporate to take, or not take, specified action that must be complied with.

1.221 A resolution direction may be issued to a related body corporate of a domestic CS facility licensee provided that it is incorporated in Australia and:

•

the body corporate is related at the time of issuing the direction, or was related immediately before a transfer of business; and

•

the RBA reasonably believes the direction is appropriate to manage or respond to the condition that placed the CS facility licensee under resolution powers. [Schedule 1, item 14, subsection 840A(1) of the Act]

Resolution direction

1.222 The RBA may issue any direction it considers appropriate in facilitating resolution. A direction may be issued to a CS facility licensee or a related body corporate that is incorporated in Australia, including a body corporate that was related to the CS facility licensee prior to the transfer of business or shares. [Schedule 1, item 14, subsection 840A(2) of the Act]

1.223 For example, the RBA may issue any of the following resolution directions:

•

to do anything, refrain from doing or do something differently under the CS facility operating rules or procedures (CS facility licensee only);

•

to amend its operating rules (but in accordance with the procedure to amend the rules outlined in the operating rules) (CS facility licensee only);

•

to provide specified information to the RBA, in connection with the performance of the RBA's functions and duties;

•

not to appoint an external administrator;

•

to remove, appoint or not appoint a director or senior manager of the body corporate;

•

not to borrow any amount;

•

not to pay a dividend or repay any amount paid on shares;

•

not to pay or transfer any amount or asset to any person, or create an obligation (contingent or otherwise) to do so (unless pursuant to an order of a court or a process of execution);

•

to acquire shares, issue, sell or cancel shares in a body corporate;

•

vary or cancel rights or restrictions attached to shares in a class of shares in the body;

•

to issue debt instruments;

•

to stop, delay or restrict an acquisition or divestiture;

•

to continue or take new actions to provide services or funding to the CS facility licensee in accordance with any existing agreement (related body corporate only);

•

to continue to operate a business where the RBA considers that the business is necessary to facilitate the resolution of the CS facility licensee (related body corporate only); or

•

to do, or refrain from doing, anything else the RBA considers relevant in relation to maintain the stability of the financial system or to continue to provide critical CS facility services.

1.224 Where a CS facility licensee is directed to change the operating rules according to the procedures outlined in the operating rules and the Act, the licensee must provide notice to ASIC under section 822D(1) of the Act. However, if notification is provided outside of the 21 day limit specified under subsection 822D(2) of the Act, the changes to the operating rules will continue to have effect. ASIC may not disallow changes under section 822E of the Act when a CS facility is directed to make such changes. [Schedule 1, item 14, section 840C of the Act]

1.225 Where the RBA issues a direction to continue to operate a business, this requires the recipient to continue to provide services or facilities that are necessary to enable the CS facility licensee to continue to operate effectively. The services and facilities must be provided on the same terms as they were under any pre-existing agreement for the duration of the agreement, or otherwise on reasonable commercial terms. The obligation to continue to provide services may include intra-group funding arrangements but cannot be extended to third party service providers.

Information gathering direction

1.226 After a condition to exercise a resolution power is satisfied, the RBA may issue a direction to a person to provide relevant information that relates to the business of a domestic CS facility licensee. The RBA must reasonably believe the person can give the information, and that the information is required for the RBA to fulfil its functions in protecting the financial system in Australia or ensuring the continuity of critical CS services.

1.227 The direction to provide information may specify the particulars of the information or documents containing the information and the form and manner it is to be provided. It must specify a reasonable time or period by which it is to be complied with and the form and manner in which the information or documents must be given. [Schedule 1, item 14, section 841A of the Act]

1.228 The required information may include a book, account or document from any person that relates to the operations of domestic CS facility licensees and related bodies corporate.

Details of Directions

Compliance

1.229 A body corporate must comply with a resolution direction despite any other provision of the Act, its constitution, its operating rules or procedures, any contract or arrangement to which it is a party and any listing rules of a financial market in whose official list it is included. However, the licensee must comply with any processes or procedures for changing the operating rules that are outlined within the operating rules (for example, consulting with participants) following a direction to change the operating rules. [Schedule 1, item 14, subsections 840A(5) of the Act]

1.230 Failure to comply with a resolution direction or an information gathering direction is an offence. Failure to comply with a direction will differ for individuals and bodies corporate, where individuals will be subject to 100 penalty units for each day or part of a day of non-compliance, and bodies corporate will be subject to ten times this amount, being 1,000 penalty units. [Schedule 1, items 14 and 23, subsection 840A(3) and Schedule 3 to the Act]

1.231 Refusal or failure to give information (or documents containing information), relating to the business of a body corporate in resolution is a criminal offence of 12 months imprisonment or 60 penalty units. [Schedule 1, items 14 and 23, subsections 841A(3) and Schedule 3 of the Act]

1.232 These penalties reflect the severity of the contravention which would likely have detrimental effects on the stability of the Australian financial system. It is imperative that directions issued during resolution are complied with in order to resolve distressed CS facilities. In addition, the penalty for contravention of a direction issued by the RBA is consistent with contravention of ASIC directions in non-crisis times.

1.233 Where a CS facility licensee fails to comply with a direction, the RBA may apply to the Court for orders enforcing the direction. The Court may make orders on the application of the RBA, if it appears to the Court that a person has contravened a direction. However, the Court can only make such an order if the Court is satisfied that the order would not unfairly prejudice any person. [Schedule 1, item 14, subsection 840A(4) and sections 841A(4) of the Act]

Period of direction

1.234 All directions issued by the RBA may specify a time or period for the body corporate to comply with the direction. [Schedule 1, item 14, subsections 840A(2) and, 841A(2) of the Act]

1.235 However, if no period is specified, the direction will continue to apply until the RBA revokes the direction. A direction continues to apply despite an external administrator or statutory manager being appointed.

Variation or revocation of a direction

1.236 The RBA may vary or revoke a direction if it is consistent with the resolution objectives. The RBA is required to provide written notice to the CS facility if it varies or revokes a direction. Upon revocation of a direction, the direction ceases to have effect. [Schedule 1, item 14, section 840B and 841B of the Act]

1.237 The making, variation or revocation of a resolution direction or information gathering directions are not legislative instruments. [Schedule 1, item 14, subsections 840B(4), 841B(4) of the Act]

Directions and other information may be subject to secrecy

1.238 The RBA may specify, in writing, that certain information relating to a direction or an exercise of a resolution power by the RBA is to be covered by a secrecy determination. In making a determination, the RBA must reasonably believe that the determination is appropriate to manage or respond to the crisis. Specified information that may be covered by a secrecy determination is information that reveals a specific resolution direction was given to a body corporate or a document was given to a body corporate by the RBA that contains specific information. [Schedule 1, item 14, subsection 848A(1) of the Act]

1.239 A body corporate is covered by a secrecy determination if it is:

•

incorporated in Australia and it is a CS facility licensee;

•

a related body corporate of a CS facility licensee or was a related body corporate of a CS facility licensee before a transfer of business or shares under this Part; or

•

a body corporate to which information has been provided in relation to a transfer. [Schedule 1, item 14, subsection 848A(2) of the Act]

1.240 A secrecy determination may be varied or revoked if the RBA considers it appropriate. A secrecy determination is valid and continues in force until it is revoked. As soon as practical after making, varying or revoking the determination, the RBA must give the body corporate a copy of the determination. [Schedule 1, item 14, subsections 848B(1), (2) and (3) of the Act]

1.241 A determination nor a variation or revocation of a determination is not a legislative instrument. A determination, variation or revocation being a legislative instrument would make the information covered by the determination or variation public, undermining the goal of the determination. [Schedule 1, item 14, subsections 848A(6) and 848B(5)]

Considerations

1.242 In making a secrecy determination, the RBA may consider if it is appropriate for specified individuals, or a class of individuals, to disclose certain information. If the RBA makes a determination in relation to specific individuals, the RBA must provide a copy of the determination to both the body corporate to which the determination relates and each person specified in the determination. If the RBA makes a determination in respect of a class of individuals, the RBA must provide a copy of the determination to the body corporate, take reasonable steps to identify who may be captured by the class, and as far as practicable, give each person in the class a copy of the determination. [Schedule 1, item 14, subsection 848E(2), (3), (3A) and (3B) of the Act]

1.243 The determination that the RBA makes permitting a person or class of persons to disclose information may specify conditions that relate to entities to which the disclosure may be made, the way the disclosure is to be made or any other matter that the RBA considers appropriate. Any conditions outlined by the RBA must be satisfied before disclosure can occur. [Schedule 1, item 14, subsection 848E(4) of the Act]

1.244 A determination allowing the disclose of information is not a legislative instrument for similar reasons outlined in paragraph 1.241.

Contravention of a secrecy determination

1.245 A person must not disclose information if that information is covered by a secrecy determination and the person is:

•

the body corporate to which the determination relates

•

an officer, employee, contractor or statutory manager of that body corporate (at the time the determination was made); or

•

any other person that, because of their employment, or in the course of their employment, has acquired the information covered by the determination.

1.246 A person listed above that discloses information covered by a determination without an exception (discussed below) or as required by a court of tribunal commits an offence with a penalty of 2 years imprisonment. The person may also be liable for a civil penalty. [Schedule 1, items 14, 22 and 23, sections 848A, 848B, and 848C, subsection 1317E(3) and Schedule 3 to the Act]

1.247 As soon as practicable after the body corporate receives a secrecy determination, the body corporate must take reasonable steps to discover and provide a copy of the secrecy determination to relevant persons. Relevant persons may include body corporates that are covered by the secrecy determination or persons that are an officer, employee, contractor or statutory manager of the body corporate to which the determination relates. Failure to take reasonable steps to determine persons that are covered by the secrecy determination and subsequently provide a copy of the determination is a criminal offence of 2 years imprisonment. [Schedule 1, items 14 and 23, subsection 848A(4) and Schedule 3 of the Act]

1.248 The strong deterrent effect of a criminal sanction is necessary for failing to comply with a secrecy determination given the substantial impacts that unauthorised disclosure of information could have on the Australian financial system. Unauthorised disclosure of information covered by the secrecy determination risks exacerbating any market instability or factor causing the crisis, further increasing financial contagion and stability risks. The same offence and same penalty applies for both Commonwealth officers and third parties. The reason for this is that the gravity of the consequences is the same no matter who discloses that information.

1.249 The provisions of the Criminal Code Act 1995 apply recklessness as the fault element for this offence. A person that impermissibly discloses information covered by a determination must be aware that the secrecy determination applies to them to be liable for an offence (see sections 5.4 and 5.6 of the Criminal Code Act 1995).

Permissible disclosure of information covered by a secrecy determination

1.250 Disclosure of the information covered by the secrecy determination is allowed where the information:

•

has already been lawfully made available to the public;

•

is disclosed to a legal representative to seek legal advice;

•

is allowed to be disclosed by an RBA determination and the relevant conditions are satisfied (see paragraph 1.242);

•

is protected information within the RB Act or ASIC Act and disclosed by a Commonwealth officer, RBA officer, ASIC member or staff member in accordance with section 79A of the RB Act or section 127 of the ASIC Act (see paragraph 1.162);

•

is allowed by the Minister's determination;

•

is disclosed to another person who is subject to the secrecy arrangement; or

•

a court or tribunal orders or directs the entity to do so. [Schedule 1, item 14, subsections 845E(1), 848C(3) and sections 848D, 848E, 848F, 848G, 848H, 848J and 848K of the Act]

1.251 The reference to officer is limited to a person employed or engaged with the RBA or for the purposes of assisting the RBA to exercise its powers. For the purposes of allowed disclosure, protected information with respect to the secrecy provisions of the RB Act is taken to include information that reveals the fact a direction has been given and information specified in the determination. Commonwealth officers may disclosure the information in the same way provided that, notwithstanding the determination, they could disclose protected information as allowed under the RB Act. [Schedule 1, item 14, subsection 848G(2) of the Act]

1.252 Because the section deems information relating to the determination to be protected information, the offence in the RB Act is disapplied where the information is authorised to be disclosed under other sections. For the avoidance of doubt, Commonwealth officers are explicitly deemed to be officers for the purpose of that protection. [Schedule 1, item 14, subsection 848G(3) and paragraph 848G(2)(c)]

1.253 The grounds allowing disclosure under the secrecy provision operate independently and do not limit each other. [Schedule 1, item 14, section 848L of the Act]

1.254 The Minister may, by legislative instrument, determine further circumstances in which disclosure can be made. The circumstances provided for in an instrument would apply to secrecy determinations generally and therefore would not reveal specific information intended to be covered by a determination. [Schedule 1, item 14, section 848J of the Act]

Protection

1.255 Where the RBA has exercised a crisis power and a person has acted in accordance with fulfilling a function under the crisis regime, that person is generally protected from criminal or civil proceedings. The protection from liability only applies to a person that acts in good faith and it is considered reasonable for the person to act in a way that achieves the purpose of performing a function or power under the crisis regime. [Schedule 1, item 14 paragraphs 849CD(1)(a) and (b) and (2) of the Act]

1.256 This protection is available to the body corporate, an officer, senior manager, employee or agent of the body corporate or person engaged to provide services to the body corporate. The protection applies to those persons with respect to a related body corporate, or an entity that was a related body corporate prior to a transfer under Part 7.3B of the Act taking place. [Schedule 1, item 14, paragraph 849CD(1)(c) of the Act]

1.257 Statutory managers have a broad immunity for any decisions and acts they make of their own volition rather than acting in accordance with a formal direction or determination from the RBA. There is sufficient oversight from the RBA in ensuring independent statutory managers are acting to resolve a crisis. [Schedule 1, item 14, subsection 849CD(3) of the Act]

1.258 When under statutory management, a director of a body corporate is protected from criminal or civil liability when doing anything or omitting to do anything in good faith under the written approval of the statutory manager. Additionally, a director acting or omitting to act, in good faith, and who may be in breach of an obligation or duty under Part 2D.1 of the Act or a similar duty under common law while the body corporate is under statutory management will not be liable for any act or omission under those Parts. That protection lasts for the period the body corporate is under statutory management. [Schedule 1, item 14, subsections 849CD(4) and (5)]

Protections for the RBA and RBA staff

1.259 The amendments introduce a broad protection in the RB Act for RBA staff and other public sector staff seconded to the RBA. The protection applies to things done, or omitted to be done, in good faith for the purposes of exercising, or purporting to exercise, powers conferred on them by:

•

Part 7.3B of the Act; or

•

section 823F of the Act (dealing with directions to preserve stability in the Australian financial system).

1.260 A civil or criminal action does not lie against a person in relation to a good faith action or omission in performance or purported performance of powers or duties under those provisions if it is reasonable for the person to do the act or make the omission to achieve the purported purpose. [Schedule 2, item 114, subsections 84A(1), (2) and (4) of the RB Act]

1.261 The persons covered by this protection are:

•

the RBA;

•

the Governor and Deputy Governor of the RBA;

•

a member of a Board of the RBA;

•

a staff member of the Reserve Bank Service;

•

an officer of another Commonwealth agency who is seconded to the RBA. [Schedule 2, item 114, subsection 84A(3) of the RB Act]

1.262 The protected information and protected document definitions in the RB Act are amended to reflect the new crisis powers. This ensures that current and previous officers do not disclose protected information or documents to any person or court unless expressly permitted or required under specified provisions. [Schedule 1, items 48, 49, 50 and 55, definition of 'protected information' and 'protected document' in subsections 79A(1), (2) and (8) of the RB Act]

Preservation of existing information sharing arrangements

1.263 The existing information sharing arrangements between the RBA and ASIC are preserved for the purposes of resolving a crisis under Part 7.3B of the Act. This is necessary to facilitate the joint administration and enforcement of CS facilities by the RBA and ASIC. [Schedule 1, items 53 and 54, subsection 79A(6A) and (6B) of the RB Act]

1.264 Consistent with the existing information sharing arrangements, the RBA and ASIC do not need to notify any person that it plans to, or has, shared information with the other regulator. While the natural justice hearing rule will not apply to the act of information sharing between the regulators, this is a limited restriction as procedural fairness will still be afforded in relation to uses of the shared information. This approach ensures the interests of affected persons are taken into account in making substantive decisions.

1.265 Disclosure of information between the regulators constitutes an authorisation by an Australian law for the purpose of Australian Privacy Principle 6 of the Privacy Act 1988.

Stays and moratorium

1.266 Effective resolution requires that critical contractual relationships of the CS facility and any related body corporates remain in place. Therefore, counterparties of the CS facility and its related body corporates are prevented from denying an obligation, accelerating debt, closing out certain transactions or enforcing security under a contract during resolution.

1.267 The stays operate to maintain CS facility functions by preventing the operation of certain kinds of rights, such as those arising from 'ipso facto' clauses. These clauses allow a party to terminate or modify the operation of a contract upon the occurrence of some specific event, regardless of otherwise continued performance of the counterparty. These ipso facto provisions have the effect of reducing the effectiveness of successful resolution.

1.268 The stay provisions ensure that vital contracts remain in place and are intended to mitigate the risk of pre-emptive actions by counterparties impeding the ability of the RBA to implement an orderly resolution or the ability of the CS facility or related body corporate to continue to operate. In addition, the primacy of the PSN Act ensures that critical contractual relationships between the CS facility and its participants are maintained.

1.269 Similarly, the RBA exercising resolution powers could result in enforcement procedures that have the potential to interfere with the orderly resolution of a body corporate. Therefore, moratorium provisions apply to suspend the enforcement of certain rights to facilitate timely assessment of the financial and operational position of the entity for administration purposes and any resolution action.

Moratorium

1.270 The moratorium will apply at the time a crisis power is exercised, either by appointing a statutory manager, a transfer is in effect, or the RBA issuing a resolution direction to the body corporate. The moratorium operates to prevent a person from beginning or continuing certain actions against a body corporate to ensure the RBA can effectively resolve a crisis. [Schedule 1, item 14, subsection 842A(1) of the Act]

1.271 The moratorium provisions do not apply to payments and property transfers to the CS facility, such that netting and collateral arrangements remain protected under the PSN Act. This includes approved real-time gross settlement systems, approved netting arrangements, close-out netting contracts and market-netting contracts that will be unimpacted by the moratorium provisions. This is intended to ensure that current protections under the PSN Act are retained and the rights of counterparties to close-out netting contracts are clear. Counterparties to a CS facility will continue to be able to close out positions to manage their risk exposures during the period of the moratorium. However, counterparties will not be able to deny their obligations under the operating rules and must continue to meet their margin obligations and any obligations under the CS facility's default management and recovery arrangements.

Application of moratorium

1.272 The moratorium provisions will commence as described above. The moratorium provisions will end when the relevant event or events occurs:

•

all statutory manager appointments are terminated by the RBA;

•

the RBA issues a Certificate of Transfer or determines the transfer should not proceed;

•

no resolution direction remains in force; or

•

if at least one statutory manager has been appointed and a transfer determination has been made – the later of:

o

(i) the appointment of all statutory managers being terminated by the RBA; and

o

(ii) the RBA issuing a Certificate of Transfer or the RBA determining that the transfer should not proceed. [Schedule 1, item 14, subsection 842A(2) of the Act]

1.273 The moratorium provisions may apply again to a body corporate if a relevant event applying a subsequent moratorium occurs in relation to the body corporate. [Schedule 1, item 14, subsection 842A(3) of the Act]

Effect of the moratorium

1.274 The moratorium provisions apply to creditors and other third parties that have rights or rights over property in relation to the body corporate in resolution.

Voluntary winding up prohibited

1.275 A body corporate cannot be wound up voluntarily while a moratorium is in effect. The Court will adjourn any applications received for the winding up of a body corporate during the moratorium. Similarly, the Court may not appoint a provisional liquidator of a body corporate under a moratorium. [Schedule 1, item 14 section 844A of the Act]

1.276 If a body corporate goes into liquidation after the moratorium provisions end, the liquidation provisions under sections 468, 471B, 471C and 500 of the Act will take effect. The CS facility licensee is required to meet any liabilities incurred and recommence legal proceedings after the lapse of the moratorium provisions.

Restricting third party property rights

1.277 In general, while the moratorium provisions apply to a body corporate a third party is restricted in exercising their rights in property of the body, or other property used or occupied by, or in the possession of, the body. This includes the restriction on a third party against enforcing a security interest where the third party, is either a secured party or a PPSA secured party in relation to the property of the body corporate. A third party that is a secured party in relation to a possessory security interest also cannot sell the property. [Schedule 1, item 14, subsections 844B(1) of the Act]

1.278 The following additional restrictions apply to a third party that is a PPSA secured party:

•

who is a lessor of property in relation to a PPSA security interest in goods arising out of a lease of the goods, then the distress for rent must not be carried out against the property, and the third party cannot take possession of the property or otherwise recover it; or

•

who is an owner (that is not a lessor) of property in relation to a PPSA security interest in the property, then the third party cannot take possession of the property or otherwise recover it. [Schedule 1, item 14, subsections 844B(1) of the Act]

1.279 The secured party may continue to possess the property while the moratorium provisions apply to the body corporate only if the secured party has lawful possession of the property that is subject to a possessory security interest. [Schedule 1, item 14, subsection 844B(3) of the Act]

1.280 The general restrictions will not apply in relation to the exercise of a third party's rights in property if the rights are exercised with the RBA or statutory manager's consent or with leave of the court. [Schedule 1, item 14, subsection 844B(2) of the Act]

1.281 At the time the moratorium provisions begin to apply, any PPSA security interest which was perfected, registered or enforceable against a third party is vested if the collateral is not registered within time. [Schedule 1, items 6 and 7, subparagraphs 588FL(1)(a)(v) and (vi) of the Act]

1.282 Similarly, upon a statutory manager being appointed to a body corporate an unperfected security interest is vested. [Schedule 1, items 44 and 45, subparagraphs 267(1)(a)(iiic) and (iiib) of the PPSA]

1.283 For the purposes of Part 7.3B, the definition of 'property' is altered to include any PPSA retention of title property of the body corporate. [Schedule 1, items 2 and 14, definition of 'property' in section 9, and subsection 833A(4) of the Act]

1.284 To the extent there is any inconsistency in the operation of subsections 844B(1) to (3) and the PSN Act, the PSN Act applies. [Schedule 1, item 14, subsection 844B(4) of the Act]

Enforcement processes suspended

1.285 Only the Court may grant leave or impose conditions to allow the enforcement process to begin or continue. A person who applies for leave of the Court must notify the RBA. The RBA is entitled to be heard on the application to the Court.

1.286 The RBA may apply to the court or tribunal to be joined as a party or to intervene in the proceedings for leave. If the RBA is joined as a party, the court or tribunal must have regard to the RBA's views in deciding whether to grant leave, and if so, whether to impose terms and the nature of those terms. [Schedule 1, item 14, section 844E of the Act]

Beginning or continuing a court proceeding

1.287 At the time the moratorium provisions come into effect, except for criminal proceedings or a proceeding prescribed in regulations, or where the RBA has given consent or the Court has given leave, a proceeding against a body corporate to which the moratorium applies cannot be continued or proceed. If a person applies for the leave of the Court that person must notify the RBA who is entitled to be heard with respect to the application. [Schedule 1, item 14, section 844C of the Act]

1.288 Various processes occur with respect to a body corporate's property to protect the rights of other people involved in the enforcement process. Upon notification that the moratorium provisions apply to a body corporate, the court officer (who may be a sheriff, registrar or other appropriate officer) is restricted from certain actions so as not to interfere with resolution. At any time from receiving the notification, the court officer is prevented from the following, unless the Court otherwise approves:

•

taking action:

o

in relation to the attachment or a debt due by the body corporate; or

o

to sell the property of the body corporate; or

•

paying a person:

o

money in relation to money received because of the attachment of a debt due;

o

proceeds of selling a property;

o

money of the body corporate seized; or

o

money paid to avoid seizure or sale of property. [Schedule 1, item 14, subsections 844F(1), (2) and (6) of the Act]

1.289 Any money or proceeds that are paid to the Court and in the court officer's possession must be provided to the statutory manager at the time of notification. If there is no statutory manager, the Court may direct the court officer to make the payment as appropriate. The position of the person who commissioned the enforcement action will be protected by providing that the court officer may retain, as a first charge on the proceeds or money given to the statutory manager, so much of the proceeds or money that the court officer thinks necessary to cover the costs of the enforcement action which has already taken place and costs which might otherwise be levied against the person who commissioned the enforcement action. [Schedule 1, item 14, subsections 844F(3), (4) and (5) of the Act]

1.290 Finally, a person who buys property in good faith under a process of execution will be protected, by providing that person with good title to the property as against the company and the statutory manager. A person that acts in good faith has the sincere intention to be fair, open, and honest. [Schedule 1, item 14, subsection 844F(7) of the Act]

1.291 The RBA or statutory manager of a body corporate is not liable to an action or other proceeding for damages in respect of a refusal to give an approval or consent for protecting the body corporate's property. [Schedule 1, item 14, section 844D of the Act]

Stays

1.292 The resolution regime includes several stay provisions that generally operate to:

•

deny termination rights or other rights when the RBA exercises a resolution power;

•

suspend enforcement of rights;

•

temporarily suspend rights when the RBA makes a notifiable instrument; and

•

prevent the termination of essential services to the CS facility.

General stay provision

1.293 The stay provisions apply to prevent counterparties from exercising certain rights under a contract with a body corporate where the RBA exercises a resolution power over that body corporate or a body corporate within the corporate group. This has the effect of preventing a party from exercising the rights mentioned below against a body corporate where another body corporate in the same corporate group is under a resolution power and either that body corporate, or a third body corporate (not necessarily subject to an exercise of power by the RBA) is suffering a deterioration in its financial position. The stay provisions also extend to a body corporate that was a related body corporate prior to a transfer of business or shares. [Schedule 1, item 14, subsections 849CC(1), (3) and (4) of the Act]

1.294 This specific type of stay is necessary to prevent credit risk across a corporate group being grounds for the denial of obligations under a contract. Termination of those services could worsen the crisis that the RBA's exercise of power is intended to address.

1.295 Counterparties must not use the RBA's exercise of power as a reason to exercise a rights such as deny an obligation, accelerate a debt, terminate or closeout a transaction, or enforce a security under a contract with a body corporate that is subject to a resolution power or a related body corporate. [Schedule 1, item 14, subsections 849CC(2) of the Act]

1.296 To the extent that the general stay may interfere with the protection provided to a particular right or transaction by the PSN Act, the PSN Act applies (see paragraphs 1.321 to 1.326). [Schedule 1, item 14, sections 849CC(5) of the Act]

1.297 Regulations may prescribe specific kinds of arrangements that the stay would not apply to allow more specific types of contracts to continue to operate despite the stay. [Schedule 1, item 14, subsection 849CC(6) of the Act]

Stay on enforcement rights and temporary suspension of rights

1.298 The stay on enforcement rights applies when a statutory manager is appointed to a body corporate, the RBA determines that a transfer is to take effect or the RBA makes a resolution direction.

1.299 The temporary suspension of rights operates by the RBA providing public notification that temporary stays are to apply if there is an intention to exercise any resolution powers.

Application of stay on enforcement rights

1.300 The stay intends to capture any of the following entities:

•

a contractual counterparty of a domestic CS facility licensee;

•

a current or former related body corporate;

•

any participants of the CS facility;

•

intra-group service providers to the CS facility licensee; and

•

third party service providers to the CS facility licensee.

1.301 The stay on clauses in contracts is intended to apply to a contract entered into by any group entity, even if no resolution action has been taken by the RBA in respect of that particular entity. For example, if a statutory manager is appointed to only a domestic CS facility licensee, the exclusion of contractual terms will apply to contracts entered into by a related operations entity with a third-party service provider.

1.302 To avoid contractual parties from exercising commercial rights that would subvert the RBA's objective of restoring financial stability, an express right is not enforceable for the reason that:

•

the body corporate being under statutory management;

•

a transfer determination being made;

•

a resolution direction being issued;

•

the financial position of the body corporate;

•

a reason prescribed in the regulations and relates to either the moratorium provisions possibly applying or the body corporate's financial position; or

•

any other reason that is in substance contrary to the aforementioned reasons. [Schedule 1, item 14, subsections 843A(1), (2) and (3) of the Act]

1.303 Generally, the period during which a right cannot be enforced begins at the time a statutory manager is appointed, a transfer determination is made or a direction is issued. The right may only be enforced after the body corporate is no longer under statutory management, a transfer has been completed, a transfer is determined not to proceed or the direction ceases to be in force. [Schedule 1, item 14, subsections 843A(4) and (5) of the Act]

1.304 The Court may extend the period for which a right is not enforceable against a body corporate if the Court is satisfied that doing so is in interests of justice. An interim order may be made while the application is being considered but cannot require an undertaking relating to damages as a condition. [Schedule 1, item 14, subsection 843A(6) of the Act]

1.305 Once the general stay period has ended, third parties are indefinitely prevented from enforcing rights to the extent that the reason for exercise of the rights relates to:

•

the body corporate's financial position before or during the stay period;

•

the body corporate being under statutory management;

•

the RBA making a transfer determination;

•

the RBA making a resolution direction in relation to the body corporate; or

•

a reason prescribed in the regulations relating to circumstances in existence before the end of the stay period. [Schedule 1, item 14, subsection 843A(7) of the Act]

Application of temporary suspension of rights

1.306 If the RBA intends to exercise a resolution power, the RBA may declare, via notifiable instrument, that a suspension of termination rights applies to a body corporate. Any action the RBA may take when a resolution condition is satisfied does not apply to the declaration made for the purposes of temporarily suspending termination rights. This is because the declaration power is based on the RBA intending to take exercise a resolution power rather than exercising the resolution power. [Schedule 1, item 14, subsection 831A(2) and section 849BA(2) of the Act]

1.307 The declaration ensures that pre-emptive actions by contractual counterparties do not impede the ability of the RBA to implement an orderly resolution or the ability of the domestic CS facility licensee or related body corporate to continue to operate. This is necessary to facilitate effective resolution without the risk of key contracts being terminated or discontinuation of services.

1.308 The temporary suspension of termination rights applies to suspend any termination right, such as termination at call or on notice (but not termination due to non-payment). The performance of those substantive obligations is subject to the application of any contractual or statutory loss allocation rules (for example, where a central counterparty's rulebook allows it to reduce mark-to-market payments following default of a participant). A counterparty may still exercise rights to early termination which arise from a failure to make payments, deliver obligations or provide collateral.

1.309 Where a declaration is in force, the temporary suspension applies to:

•

a domestic CS facility licensee; or

•

related body corporate, of a domestic CS facility licensee, that is incorporated in Australia. [Schedule 1, item 14, section 849BA(1) of the Act]

1.310 The declaration has the effect of temporarily suspending an entity's right to terminate a contract with the body corporate, by preventing a third party from exercising a right to terminate:

•

a contract, agreement or arrangement; or

•

an obligation arising under a contract, agreement or arrangement from an express provision or because of anything done in accordance with a direction to preserve financial stability under section 823F of the Act. [Schedule 1, item 14, section 849BB(1) of the Act]

Rights not subject to the stay under enforcement of rights and temporary suspension

1.311 There are some cases where it would not be appropriate for a stay against the enforcement of rights to apply because of the nature of the agreement or the parties to the agreement. The stay on enforcement rights and temporary suspension of rights does not apply to:

•

rights that relate to a contract, agreement or arrangement that was entered into after either the statutory manager was appointed or the notifiable instrument is in force (as relevant);

•

rights that are part of a type of contract, agreement or arrangement that are specified in the regulations or are declared by the Minister; or

•

a right of a kind declared by the Minister; or

•

to the extent that the RBA or liquidator (appointed after the stay period) has provided written consent. [Schedule 1, item 14, subsections 843B(1), (2), (3) and (4) and 849BB(2) and (4) of the Act]

1.312 Notwithstanding the operation of the stay, a counterparty maintains the ability to enforce a right for reasons such as where the body corporate has failed to meet payment, performance or other obligations under the agreement such as a default management or recovery action.

1.313 However, where rights cannot be enforced against a body corporate or exercised by the body corporate because they are under the stay period and the body corporate has a right against another entity to a new advance of money or credit. However, the body corporate may exercise this right if the entity which owes the body corporate is a related body to the body corporate and is exercising its own right against the body corporate. This is required to ensure continuity of arrangements within the broader group of which the body corporate is a part. [Schedule 1, item 14, subsections 843C(1) and (2) of the Act]

1.314 For the temporary suspension of rights, there are two additional rights that are not captured including:

•

a right that is exercisable only in particular circumstances; or

•

a right that arises from acting in accordance with a direction to preserve financial stability or a recapitalisation direction under section 823F of the Act after the notifiable instrument is in force. [Schedule 1, item 14, paragraphs 849BB(2)(a) and (b) of the Act]

1.315 During the temporary stay, parties to a contract retain the ability to exercise contractual termination rights in particular circumstances, such as if substantive obligations under the contract are not complied with. Additionally, participants retain the ability to execute new transactions, which may have the same effect as the closing out of certain positions, or other market risk management transactions.

1.316 A declaration of rights by the Minister is a legislative instrument. The Minister may declare contracts or agreements that are referred to in Commonwealth law or declare kinds of rights to which a stay on enforcement rights broadly does not apply, or does not apply in specific circumstances. [Schedule 1, item 14, subsection 849BB(3) of the Act]

1.317 The regulation making powers are intended to ensure that reasons and clauses in agreements are appropriately captured or excluded. The regulation making power to extend the stay to apply to clauses in agreements is appropriately designed to ensure relevant reasons for not enforcing a right are adequately captured. The regulation making power to exclude certain types of contracts is necessary to ensure that rights which are central to the operation of the CS facility such as those arising from market netting contracts and other types of financial contracts remain enforceable. The regulation making power may be relied upon to protect transactions underpinned by International Swaps and Derivatives Association (ISDA) Master Agreements and similar contractual arrangements that are not within the scope of the PSN Act. The regulation making powers under the stay provisions are consistent with the existing regulation powers under the stay regime under Part 5.3A of the Act.

Automatic stay

1.318 An automatic stay on early termination and certain other rights operates so that resolution actions by the RBA are not undermined. The stay provisions apply to self-executing provisions of contracts, agreements or arrangements. The stay on the exclusion of contractual terms comes into operation automatically, at the time the RBA appoints a statutory manager, makes a transfer determination or issues a resolution direction and ensures that a contract cannot be terminated. [Schedule 1, item 14, sections 843D and 849BC of the Act]

Temporary suspension of rights: revocation of notifiable instrument

1.319 The RBA must revoke the declaration that temporary suspension of rights applies if there is no intention to exercise a resolution power. [Schedule 1, item 14, subsections 849BA(3) and (4) of the Act]

Supply of essential services

1.320 Whilst under statutory management a supplier of essential services such as gas, electricity, water or a carriage service must not refuse to supply these services nor make it a condition that an amount be paid before supplying of the essential service. The statutory manager may apply for an injunction jointly with the RBA if a supplier refuses to comply with the requirement to supply essential services or imposes a condition that an amount be paid first. [Schedule 1, item 14, subsection 836H the Act]

Stay interactions with other laws

1.321 Despite the explicit provision on the enforcement of rights, where there is an inconsistency between the PSN Act, the International Interests in Mobile Equipment (Cape Town Convention) Act 2013 (Cape Town Convention Act), the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (AML/CTF Act) and the Autonomous Sanctions Act 2011 (ASA 2011), those Acts will take priority. [Schedule 1, item 14, sections 843E and 849BD of the Act]

1.322 The PSN Act takes precedence to ensure that critical market netting, close out netting, and real time gross netting contracts continue to function despite the operation of the moratorium and stays. For example, the CS facility operating rules are a market netting contract that underpin the operation of the facility, and it is therefore crucial that those arrangements operate as normal during resolution. Given this important function, the RBA will generally follow the CS facility's operating rules to the extent possible under the prevailing financial stability conditions when exercising resolution powers. If the RBA intends to alter any the operating rules, the RBA would be required to follow the usual process of consultation with participants. These changes are unlikely to include fundamental changes to loss allocation such as initial margin haircutting.

1.323 The justification for this explicit hierarchy in relation to the Cape Town Convention Act and ASA 2011 is that these Acts outline Australia's approach to international coordination. In particular, the Cape Town Convention codifies the treaty to standardise transactions involving movable property. Its purpose is to protect the interest of the sellers, purchasers and creditors through the creation of an International Registry. It outlines internationally consistent remedies available to the lender in the event of default or insolvency.

1.324 Because of the nature of the offence in section 16 of the ASA 2011 (particularly the strict liability nature), a person could be theoretically acting in accordance with the Act, but would be in breach of the ASA 2011.

1.325 It is important that the AML/CTF Act take precedence. The AML/CTF Act regulates financial, gambling, remittance and bullion sectors that provide designated services and imposes key obligations on regulated businesses. Given the policy significance of these obligations, this provision has been included to ensure these amendments do not unintentionally affect the operation of the AML/CTF Act.

1.326 If a transaction was entered into when the moratorium provisions apply to the body corporate and the transaction is uncommercial, or an unfair preference was given by the body corporate to a creditor of the body corporate, an insolvent transaction occurred, or a creditor defeating disposition by the body corporate occurred – the transaction is not voidable under section 588FE of the Act merely for those reasons. [Schedule 1, item 14, sections 843F and 849BE of the Act]

General power to make orders

1.327 The Court has the power to make orders in respect of any moratorium provision to deal with property disputes over how the stay provisions apply. In addition, the Court may make an order for how the temporary suspension of termination rights should apply. The inclusion of the general power is to mostly deal with how the RBA may operate in relation to a particular body corporate, subject to conditions. An order may be made on application of the body corporate, a creditor of the body corporate, a statutory manager of the body corporate, the RBA, or any other interested person. [Schedule 1, item 14, sections 845A and 849BF of the Act]

Interactions between regulators in a crisis

1.328 During resolution, it is intended that the RBA's powers to resolve a crisis will have priority over any powers ASIC takes in respect of CS facilities, and, in certain circumstances, Australian market licensees. Accordingly, ASIC:

•

must act in a way that supports resolution of a CS facility licensee;

•

must not exercise rule-making or directions powers in respect of CS facilities and market licensees without a non-objection from the RBA; and

•

may comply with the RBA's request to exercise rule-making and direction powers (where no other conditions need to be met to exercise the power).

1.329 The RBA may request ASIC to issue directions or make CS facility or market integrity rules during a crisis. The request must be in writing and outline the reasons for the request to exercise a power. [Schedule 1, item 14, section 849AB of the Act]

1.330 ASIC's compliance with the RBA's request to exercise powers does not require any other conditions to be met. That is, ordinary conditions to issue a supervisory direction or make CS facility or market integrity rules do not need to be met if the RBA has requested ASIC's assistance. [Schedule 1, item 10 and 11, subsections 798G(5A) and (6) of the Act; Schedule 2, item 65, subsection 826Q(1) of the Act]

1.331 If the RBA requests ASIC to make or vary a direction, ASIC may issue the written direction to a market licensee that may require the licensee to do, or refrain from doing, certain actions. The written direction must include a reasonable period to comply with the direction. The licensee must comply with the direction. Failure to comply with the direction is 100 penalty units for an individual and 1,000 penalty units for a body corporate for each day or part of day the offence is committed. Further, failure to comply with the direction may result in ASIC applying to the Court for an order that the licensee comply with the direction. [Schedule 1, items 9 and 23, sections 794AA and 794AB and Schedule 3 of the Act]

1.332 ASIC must also give written notice of the direction, variation or revocation to the operator of the CS facility with which the market licensee has arrangements. [Schedule 1, item 9, subsection 794AB(3) of the Act]

1.333 These directions are not legislative instruments. [Schedule 1, items 9, subsections 794AB(4) of the Act; Schedule 2, items 70 and 65, section 798JA and subsection 826Q(5) of the Act]

1.334 If ASIC makes CS facility or market integrity rules in accordance with the RBA's request, the Minister does not need to provide consent. However, ASIC must provide a copy of the RBA's request to the Minister. If the Minister considers it appropriate, the Minister may direct ASIC to vary or revoke the rules, and ASIC must comply with that direction. [Schedule 1, item 10, subsections 798G(5B), (5C) and (5D) of the Act; Schedule 2, item 65, subsections 826Q(1), (2), (3) and (4) of the Act]

1.335 Whilst a body corporate, or a related body corporate of that body corporate is:

•

under statutory management;

•

subject to a potential transfer of shares or business (a certificate has been issued but the RBA has not yet determined the transfer should take effect);

•

subject to a resolution direction;

•

ASIC must not exercise any rule-making or direction powers in respect of that body corporate, a related body corporate of that body corporate, or a market licensee that has a clearing and settlement arrangement with the body corporate, without receiving a request or express, written non-objection from the RBA to exercise those powers. This includes making rules, giving advice or a direction to the licensee, or an act under the regulations. [Schedule 1, item 14, subsections 849CA(1), (2), (3) and (6) of the Act]

1.336 These provisions are intended to allow for control over CS facilities and their related bodies corporate that is necessary for successful resolution. These requirements also ensure close coordination between ASIC and the RBA over any actions with respect to CS facilities and their related bodies corporate.

1.337 In the event that the RBA objects to the action by ASIC, ASIC may escalate the matter to the Minister, who may direct the RBA to withdraw the objection. The RBA must comply with the Ministers direction. [Schedule 1, item 14, subsections 849CA(4), (5) and (6) of the Act]

1.338 While RBA actions under Part 7.3B of the Act are likely to be pertinent to ASIC's regulatory remit in respect of CS facilities and potentially related bodies corporate of CS facilities, explicit legislative requirements for RBA consultation with ASIC before action is taken under Part 7.3B of the Act are not included. This is so that resolution actions can be undertaken as efficiently and effectively as possible without needing to satisfy additional legislative requirements. This does not limit the ability of RBA and ASIC to communicate regarding crisis resolution actions. RBA and ASIC can arrange a memorandum of understanding specifying how and when any consultation related to the use of powers under Part 7.3B of the Act should occur. A memorandum of understanding could be used similarly for powers outlined in Chapters 2 and 3 where consultation between the regulators is not legislatively required.

Merits review in a crisis

1.339 Any decisions made under Part 7.3B of the Act are not subject to merits review. This includes RBA decisions and extends to any directions issued by ASIC in accordance with the RBA's request. The exclusion of merits review in a crisis is justified on the basis that it is not conducive to certainty in a regime designed to address a crisis. Furthermore, the crisis regime relates to financial decisions with a significant public interest, which is an allowable exemption from merits review under the Administrative Review Council's publication 'What decisions should be subject to merit review' (see paragraphs 4.34 to 4.38 of that publication). [Schedule 1, items 18, 19, 20 and 21, paragraphs 1317C(gcad), (gcba), (gccf) and (gcf) of the Act]

1.340 Decisions in a crisis, such as, the appointment of a statutory manager, are likely to have a strong public interest element and to occur where there is a need to take rapid action to restore or maintain confidence in the markets serviced by the CS facility. A merits review could cause substantial delay in resolution and could result in the original decision being varied, substituted with a new decision, or remitted back to the RBA for reconsideration. This delay in the ability for the statutory manager to take action, or a lack of certainty underpinning resolution decisions, has potential to significantly impact financial stability or the continuity of CS facility services.

Consequential amendments

1.341 As a result of the additional directions powers to be given to a market licensee in a crisis under subsections 794AA(1) or 798JB(1) of the Act, a consequential amendment is made to ensure that Division 3 financial products are deemed to be tradable for the purposes of the prohibition against insider trading. [Schedule 1, items 15, 16 and 17, section 1042E of the Act]

1.342 In line with the ALRC recommendation to have a single glossary of defined terms in section 9 of the Act, the definition of essential service has been repealed from section 600F(2) of the Act and moved to section 9 of the Act. This has caused a number of provisions in the industry Acts to be amended to refer generally to the Corporations Act to capture the defined term in section 9. This amendment is aimed at improving navigability and does not change the operative function of the provisions. [Schedule 1, items 1, 36, 37, 38, 39, and 40, definition of 'essential service' in section 9 and subsection 600F(2) of the Act, subsection 15BD(2) of the Banking Act 1959, subsections 62PD(2) and 62ZOV(2) of the Insurance Act 1973, and subsections 161D(2) and 179AV(2) of the Life Insurance Act 1995]

Commencement, application, and transitional provisions

1.343 The amendments that establish the crisis resolution powers and the crisis prevention powers in Schedule 1 and Part 9 of Schedule 2 to the Bill commence on the seventh day after Royal Assent.

1.344 Given that the amendments to the functions of the RBA interact with the amendments under Treasury Laws Amendment (Reserve Bank Reforms) Act 2024, three alternative commencement dates are included to ensure that regardless of whether that Bill commences, the new crisis functions under Part 7.3B of the Act are included. [Schedule 1, items 64, 65, and 66 , paragraph 10(2), 10B(1) and 10B(3) of the RB Act]

1.345 A contingent amendment is included in anticipation of the Treasury Laws Amendment (Reserve Bank Reforms) Act 2024 commencing. That Bill will abolish the RBA Board and establish a Governance Board and a Monetary Policy Board. The amendment will omit the Reserve Bank Board and add the Governance Board and the Monetary Policy Board as persons covered by the protection. This amendment will commence only if and when the above mentioned Bill commences. [Schedule 2, item 143, paragraph 84A(3)(d) of the RB Act]

Chapter 2: Strengthening Australia's FMI regulatory framework - Crisis prevention (RBA powers)

Outline of chapter

2.1 Schedules 1 and 2 provide the RBA with certain enforcement powers with respect to its role in supervising CS facilities to mitigate the risk of a crisis occurring.

2.2 All legislative references in this chapter are to the Corporations Act unless otherwise stated. Further, all references to "domestic CS facility licensee" in this chapter are references to a body corporate registered under Chapter 2A who is granted an Australian CS facility licence under subsection 824B(1) of the Act unless the contrary intention is stated.

Context of amendments

2.3 The regulation of CS facilities is shared between ASIC and the RBA, where:

•

ASIC is responsible for licensing and compliance obligations of licensees; and

•

the RBA is responsible for maintaining the stability of Australia's financial system by determining the Financial Stability Standards and assessing whether licensees have complied with the Financial Stability Standards and taken other necessary steps to reduce systemic risk.

2.4 To achieve this the RBA has a role in mitigating the risk of financial disturbances with potentially systemic consequences, and in responding if such a disturbance does occur. This role involves monitoring CS facilities and providing advice on emerging stress in these facilities.

2.5 The RBA currently does not have any enforcement powers to require CS facilities to take actions to promote financial stability. The amendments explained in this chapter (as well as some amendments explained in Chapter 3) equip the RBA with enforcement powers in line with their objective of promoting financial system stability.

Summary of new law

2.6 The RBA will have a suite of increased general powers that may be used at any time. These powers are intended to enhance supervision so the RBA can effectively prevent a crisis, including:

•

imposing notification requirements;

•

issuing directions, including the power to request information;

•

resolution planning; and

•

setting resolvability standards.

Notification requirements

2.7 The amendments impose notification obligations on CS facility licensees to advise the RBA of a material change in circumstances. This has the effect of increasing the RBA's awareness of potentially distressed CS facilities and mitigating the risk of a crisis materialising.

Directions

2.8 The RBA will be equipped with powers to issue a direction at any time with the aim of preventing a crisis from crystalising. Given the co-regulatory nature of the oversight of CS facilities between the RBA and ASIC, providing a directions power to the RBA clarifies the RBA's role in the oversight of CS facilities with respect to financial system stability. Further, transferring the Ministerial directions powers to ASIC (see Chapter 3) solidifies ASICs supervisory role and assists in further clarifying regulator responsibilities.

2.9 The RBA will have the power to direct a licensee to preserve financial stability, reduce systemic risk and issue recapitalisation directions which is accompanied by powers to request the provision of information by CS facility licensees and related bodies corporate. The information gathering power enables the RBA to request information to fulfill any of its functions, including resolution planning.

Resolution planning and resolvability standards

2.10 In addition to having a wide and flexible set of powers to intervene in a crisis, it is important that the RBA has clear powers to undertake resolution planning and set appropriate resolvability standards to address potential barriers to the orderly resolution of a CS facility.

2.11 The RBA will be empowered to set resolvability standards that stipulate compliance with requirements and activities for classes of domestic CS facility licensees or related bodies corporate. The standards address potential impediments to resolution of the facility.

Detailed explanation of new law

Notification obligations

2.12 In order to prevent a crisis from materialising, the RBA must be notified of certain circumstances to assess whether intervention is required. CS facility licensees and related bodies corporate must notify the RBA of specified events.

Events the RBA must be notified of

2.13 CS facility licensees must notify the RBA immediately once they become aware of any changes in their circumstances, including:

•

failure, or likely failure, to comply with either the Financial Stability Standards or resolvability standards;

•

breaching, or likely to no longer meet, the obligation to do all things necessary to reduce systemic risk;

•

the ability to continue providing critical CS facility services (including where external support is needed or where the entity has ceased, is ceasing or is likely to cease to provide critical CS facility services);

•

financial viability is at risk or likely to be at risk, including financial viability risk in the absence of external support (for example, financial obligations that can no longer be met or an intention to suspend payment); or

•

where a participant has met one or more of the default event conditions in the operating rules of the CS facility or is declared to be in default under those rules. [Schedule 1, item 26, section 821BA of the Act]

Material changes

2.14 CS facility licensees and related bodies corporate that are incorporated in Australia, must notify the RBA immediately once they become aware of any material changes in their circumstances that relate to risk management or the ability of CS facility licensee to operate and affect:

•

the solvency of the body corporate;

•

changes to ownership of greater than 20 per cent in voting power for a related body corporate that is a listed entity;

•

changes to the structure of the body corporate or the group that includes the body corporate and related bodies corporate; or

•

the provision of one or more CS facilities that are critical to the functioning of the financial system. [Schedule 1, item 28, section 821J of the Act]

2.15 A CS facility licensee or related body corporate that is incorporated in Australia must provide the RBA with immediate written notification if it:

•

intends to enter into a transaction to recapitalise, such as the sale or disposal of any of its shares or shares of a holding company (this does not prevent the normal trading of shares in a listed entity); or

•

proposes a plan to restructure that is agreed by the board of the body corporate. [Schedule 1, item 28, section 821H of the Act]

2.16 If the body corporate purports to enter into a transaction to recapitalise, or carries out a plan to restructure and does not provide written notice, then the act is invalid. However, the body corporate has the opportunity to write to the RBA to have the contravention disregarded. It is at the discretion of the RBA on whether to disregard the contravention. If the RBA agrees to disregard the contravention, the act will be valid and have effect. [Schedule 1, item 28, subsections 821H(2), (3), (4) and (5) of the Act

2.17 It is intended for a body corporate to only notify the RBA once, so subsequent notification of the same matter does not need to be provided to the RBA This is the case for a body corporate that has provided notification of material changes under another provision under Part 7.3 of the Act. Similarly, where a CS facility licensee has provided notification to the RBA under 821BA on a matter that relates to subsections 821B(1) to (4) of the Act, additional notification is not required to be provided to ASIC. [Schedule 1, item 25 and 28, subsections 821B(7) and 821J(5) of the Act]

External administrators subject to notification requirements

2.18 Domestic CS facility licensees and related bodies corporate that are incorporated in Australia must provide the RBA at least seven days notice that an external administrator is to be appointed. This requirement to notify the RBA also applies where the person appointing the external administrator is not the body corporate (for example, a creditor – see Division 2 of Part 5.3A of the Act). [Schedule 1, item 28, subsection 821K(1) of the Act]

2.19 The appointment of an external administrator indicates a potential default event and could trigger termination rights which have the potential to jeopardise the continuity of critical CS facility services. The prior notification offers the RBA the opportunity to understand the circumstances and to take appropriate and timely action.

2.20 The RBA must approve the appointment of the external administrator before it is appointed to the body corporate that is incorporated in Australia. If the RBA does not approve and the external administrator is appointed, all actions in relation to the body corporate's business are invalid. [Schedule 1, item 28, subsections 821K(3) and (4) of the Act]

2.21 The notice period provides the RBA with time to consider the circumstances and decide if the RBA should exercise any of its resolution powers, including the appointment of a statutory manager.

2.22 Between the time that a person notifies the RBA and the RBA consents to the appointment of an external administrator, or the RBA exercises a resolution power, there is a risk that directors of the body corporate are exposed to liability for insolvent trading. Therefore, a safe harbour protection is applied so that, for example, the Board of a body corporate that provides notification is not exposed to risk during the period starting once one of the triggers for the offence of trading while insolvent are active (see 588G(1) of the Act) and ending on the appointment of the external administrator, or exercise of a resolution power, if the required notice is given to the RBA prior to that starting point. [Schedule 1, item 28, subsection 821K(5) of the Act]

Liquidators subject to notification requirements

2.23 Liquidators or provisional liquidators will be subject to notification requirements due to their actions having a potential impact on the continuity of CS services or the stability of Australia's financial system.

2.24 A liquidator must give written notice to the RBA at least seven days prior to making a court application under Chapter 5 of the Act in relation to a matter arising under the winding up or proposed winding up of a domestic CS facility licensee or a related body corporate that is incorporated in Australia. The written notice must include the details of the proposed application and the RBA is entitled to be heard on an application. [Schedule 1, item 28, subsections 821L(1), (2) and (3) of the Act]

2.25 The RBA may request the liquidator or provisional liquidator to provide additional information within a reasonable time about the application, winding up (or proposed winding up) of the body corporate or any other affairs of the body corporate. The liquidator or provisional liquidator must comply with this request. [Schedule 1, item 28, subsections 821L(4) and (5) of the Act]

Consequences of failing to notify

2.26 Failure to notify the RBA of a material change of circumstances or intended actions is a criminal offence of imprisonment for 2 years. [Schedule 1, items 26, 28 and 34, subsections 821BA(1), 821H(1), 821J(1), 821K(1) and Schedule 3 of the Act]

2.27 A strict liability offence is considered appropriate in this instance as failure to notify of material changes or intended appointments may have detrimental impacts on the stability of the financial system in Australia. If the RBA is not given prior notice it risks the RBA's ability to effectively consider the circumstances and take appropriate and timely action to protect financial system stability.

2.28 The penalty for the offence complies with the requirements of the Government's Guide to Framing Commonwealth Offences, Infringement Notices and Enforcement Powers.

Directions

2.29 The amendments provide the RBA with powers to issue directions to a CS facility licensee to:

•

comply with its obligations;

•

increase compliance or reduce systemic risk;

•

preserve stability in the Australian financial system;

•

provide information to assist the RBA in performing its functions.

Direction to comply with CS facility licensee obligations, increase compliance, reduce systemic risk or ensure effective crisis resolution

2.30 The RBA is empowered to issue a direction to a CS facility licensee and in some cases, a related body corporate, to do specified things that the RBA believes will promote compliance by the licensee with those obligations if it considers a CS facility licensee has not fulfilled the obligation to:

•

comply with the Financial Stability Standards determined under section 827D of the Act;

•

comply with the resolvability standards under section 827DA of the Act;

•

take a specified action to address an impediment to the effective exercise of the resolution powers;

•

do all things reasonably practicable to reduce systemic risk in the provision of the facility's services;

•

comply with the notification obligations under section 821BA; or

•

comply with the obligation to give the RBA assistance, including in a crisis, under section 821C(3). [Schedule 1, item 27, and subsection 821C(3) of the Act; Schedule 2, item 88, sections 823E, 823F and 823G of the Act]

2.31 The power to issue a direction to reduce systemic risk is transferred from ASIC to the RBA, consistent with streamlining and clarifying regulator roles to produce the outcome of the RBA having oversight of CS facilities in relation to financial stability and the reduction of systemic risk. The RBA's power to issue a direction to preserve financial system stability and ensure effective crisis resolution are new directions powers.

2.32 The process of issuing a direction to reduce systemic risk is broadly the same, with the main intention to simplify the ability for the RBA to issue a direction on the basis that it considers that a CS facility licensee is not complying with the Financial Stability Standards. Under the current law to issue a direction to reduce systemic risk, the RBA may only request ASIC to issue a direction, with ASIC making the decision on whether to issue the direction.

Removing the qualifier to complying with the Financial Stability Standards

2.33 A CS facility licensee is currently required to comply with the Financial Stability Standards to the extent that it is reasonably practicable to do so. This qualifier has the potential to prevent the effective exercise of the RBA issuing directions as the making of the direction could be challenged on the basis that the measures to achieve compliance with the Financial Stability Standards exceed what is reasonably practicable for the CS facility licensee. This could potentially delay full compliance with the Financial Stability Standards.

2.34 The amendments remove the qualifier for complying with the Financial Stability Standards. This means CS facility licensees will be required to comply with standards in force under section 827D of the Act and, to the extent that it is reasonably practicable to do so, continue to do all other things necessary to reduce systematic risk. [Schedule 2, item 80, paragraphs 821A(1)(aa) and (ab) of the Act]

Direction to preserve stability in the Australian financial system

2.35 Where the RBA considers that a domestic CS facility licensee is conducting, or likely to conduct, its affairs in a way that may cause or promote instability in the Australian financial system, the RBA may issue a direction outlining a specific course of action the CS facility licensee must take. The RBA may exercise these powers if:

•

the licensee informs the RBA it is likely to be unable to meet one or more of its obligations;

•

the RBA reasonably believes the licensee may become unable to meet one or more of its critical obligations or operate the facility consistently with the stability of the Australian financial system, without external support; or

•

the RBA reasonably believes the licensee is conducting or is likely to conduct its affairs in a way that may cause or promote instability in the Australian financial system. [Schedule 2, item 88, subsection 823F(2)of the Act]

2.36 The regulations may specify a particular form of support is not external support. [Schedule 2, item 88, subsection 823F(3) of the Act]

2.37 The following are types of specific directions the RBA may issue to a CS facility licensee:

•

to do, or refrain from doing, anything under the CS facility licensee's operating rules or procedures (including documents, determinations, practice notes or handbooks relating to the licensee's operation, conduct of participants in the facility, or the structure and operation of electronic communications);

•

amend its operating rules or procedures;

•

a recapitalisation direction (refer below);

•

not to pay a dividend on any shares;

•

not to repay any amount paid on shares; or

•

exercise rights under a contract or agreement (including termination rights). [Schedule 2, item 88, subsection 823F(1) of the Act]

2.38 Where a CS facility licensee is directed to change the operating rules according to the procedures outlined in the operating rules and the Act (and other than under a direction given under section 840A of the Act), the licensee must provide notice to ASIC under section 822D(1) of the Act. However, the changes to the rules will continue to have effect regardless if notification is provided after 21 days under subsection 822D(2) of the Act. ASIC may not disallow changes under section 822E of the Act when a CS facility is directed to do make such changes. [Schedule 2, item 88, section 823S of the Act]

Recapitalisation direction

2.39 In accordance with an expert's report on the fair value of shares or after working out the fair value of other capital instruments, the RBA may issue a recapitalisation direction to a domestic CS facility licensee to deal with the following:

•

increase the licensee's level of share capital to a specified level;

•

issue one or more classes of shares or right to acquire shares in the licensee; or

•

issue one or more capital instruments prescribed by the regulations. [Schedule 2, items 88 and 96, paragraph 823F(1)(c) and section 9 of the Act]

Expert report

2.40 Prior to issuing a recapitalisation direction relating to shares, the RBA must obtain an expert report on the fair value of the shares or rights in the domestic CS facility licensee. The report cannot be completed by an associate (within the meaning of Division 2 of Part 1.2 of the Act) of the body corporate. [Schedule 2, item 88, subsection 823M(1) of the Act]

2.41 The report must set out the fair value of each share or right, and the reasons for the expert forming that opinion. In addition, the report must specify any monetary or non-monetary interest that could affect the expert's judgment, including any connection between the expert, the licensee and persons associated with the licensee. The RBA must consider the report. [Schedule 2, item 88, subsection 823M(2) of the Act]

2.42 In determining the fair value of each share in a CS facility licensee, the expert must:

•

assess the licensee's value as a whole in accordance with any assumptions the Minister provides;

•

allocate that value among the classes of shares that have been issued or that the RBA proposes to be issued in compliance with the direction (taking into account financial risk and voting distribution rights of the classes);

•

then after that allocation, allocate the value of each class pro rata among the shares in the class that has been issued, or that the RBA proposes to be issued. [Schedule 2, item 88, subsection 823N(1) of the Act]

2.43 Written assumptions that the Minister or RBA may provide to the expert include the valuation of the CS facility licensee and the valuation of rights to acquire shares in the CS facility licensee. The Minister and RBA may not amend the assumptions provided to the expert, but are permitted to revoke the assumptions in writing. The written assumptions or subsequent revocation is not a legislative instrument – this provision is included to assist readers.

2.44 If there is any inconsistency between the Minister's assumptions and RBA's assumptions, the Minister's assumptions prevail to the extent of any inconsistency. [Schedule 2, item 88, subsections 823N(3), (4), (5) and (6) of the Act]

2.45 Where the RBA gives a direction relating to capital instruments, the RBA must comply with any requirements prescribed in the regulations for ascertaining the fair value of capital instruments or classes of capital instruments. [Schedule 2, item 88, section 823P of the Act]

Exception

2.46 An expert report is not required to be obtained where the RBA considers that obtaining the expert report would detrimentally affect the continuity of critical CS facility services or financial stability. Similarly, failure for the RBA to obtain an expert report, determine the fair value of shares or comply with the requirements in the regulations relating to capital instruments does not affect the validity of a recapitalisation direction or anything done in complying with the direction. This is justified on the basis that certainty is required for recapitalisation to support the continuity of CS facility services and ultimately the financial stability in Australia. The 'no invalidity' clause does not exclude judicial review under section 75(v) of the Constitution and section 39B of the Judiciary Act 1903 where failure to meet procedural requirements would amount to jurisdictional error. [Schedule 2, item 88, subsection 823M(4) and section 823Q of the Act]

2.47 The RBA may publish details of the report or details that relate to the report. [Schedule 2, item 88, subsection 823M(3) of the Act]

2.48 As soon as practicable after complying with a recapitalisation direction, a domestic CS facility licensee or related body corporate must provide written notice to members of the body corporate (including those who were members of the licensee just before the issue), identifying the issue and explaining its effect on their interests as members. [Schedule 2, item 88, subsection 823L(1) of the Act]

2.49 The acquisition of shares or other capital instruments as a result of compliance with a recapitalisation direction is specifically authorised and is disregarded in working out whether a person has contravened restrictive trade practices under subsection 51(1) of the Competition and Consumer Act 2010. [Schedule 2, item 88, section 823R of the Act]

Direction to provide information

2.50 The RBA may give a written direction to a CS facility licensee or related body corporate to provide the RBA with specified information or documents containing specified information relating to the CS facility licensee's business where:

•

the RBA reasonably believes that the CS facility licensee has information or documents and can give that information or the documents; and

•

that information or documents would assist the RBA to perform its functions under Part 7.3 of the Act. [Schedule 2, item 88, subsections 823H(1) and (2) of the Act]

2.51 The direction may specify the form and manner that the information or documents are to be provided. [Schedule 2, item 88, paragraph 823H(3)(b) of the Act]

Process of directions

Variation or revocation and publication

2.52 The RBA may vary or revoke a direction but is required to provide written notice to the CS facility. Upon revocation of a direction, the direction ceases to have effect. The RBA is permitted to publish the details of directions, variations or revocations to a direction as it considers appropriate. [Schedule 2, item 88, section 823K and 823T of the Act]

Referral to the Minister

2.53 The RBA must comply with a request from a licensee for the RBA to refer a direction to increase compliance or reduce systemic risk to the Minister. If the Minister considers it appropriate, the Minister may require the RBA to vary or revoke the direction, where the RBA must comply immediately. [Schedule 2, item 88, subsections 823E(4) and (5) of the Act]

Reviewability

2.54 For most directions issued by the RBA under Part 7.3 of the Act, applications may be made to the tribunal for review. The exception to this is a direction issued to preserve stability in the financial system under section 823F of the Act. The RBA's decision to issue a direction would be a financial decision of significant public interest, which is an allowable exemption from merits review under the Administrative Review Council's publication 'What decisions should be subject to merit review' (see paragraphs 4.34 to 4.38 of that publication). [Schedule 1, item 32, subsection 1317B(1) and Schedule 2, item 91, paragraph 1317C(gcce) of the Act]

Compliance with RBA direction

2.55 CS facility licensees must comply with all directions issued by the RBA. [Schedule 2, item 88, subsections 823E(3), 823F(5), 823G(3), 823H(4), 823L(2) of the Act]

2.56 Directions issued by the RBA must specify a reasonable period for the CS facility licensee to comply with the direction. A direction concerned with preserving the stability of the financial system may deal with multiple matters. [Schedule 2, item 88, subsections 823E(2), 823F(4), 823G(2), 823H(3) of the Act]

Contravention

2.57 Failure to comply with the RBA's direction to provide information is 100 penalty units for each day or part of day the offence is committed, for an individual and 1,000 penalty units for a body corporate. [Schedule 2, items 88 and 94, subsection 823H(5) and Schedule 3 to the Act]

2.58 Failure to comply with the RBA's specific direction to preserve financial stability incurs a penalty of 2 years imprisonment. [Schedule 2, items 88 and 94, subsection 823F(5) and Schedule 3 to the Act]

2.59 Failure to comply with the RBA's direction to take measures to comply with resolvability standards or remove an impediment to respond to a crisis condition is an offence with a penalty of 2 years imprisonment. [Schedule 2, items 88 and 94, subsection 823G(3) and Schedule 3 of the Act]

2.60 A CS facility must comply with a recapitalisation direction despite the Act, its constitution, its operating rules or procedures, any contract or arrangement to which it is a party, and any listing rules of a financial market in whose official list it is included. [Schedule 2, item 88, subsection 823L(5) of the Act]

Orders

2.61 Where a CS facility licensee fails to comply with a direction, the RBA may apply to the court. The Court may make orders on the application of the RBA (alone or jointly with ASIC), if it appears to the Court that a person has contravened a direction. However, the Court can only make such an order if the Court is satisfied that the order would not unfairly prejudice any person. In addition, in the event of non-compliance with a recapitalisation direction, the RBA may apply to the Court for an order that the licensee comply with the recapitalisation direction. The Court may order the CS facility licensee to comply with the direction [Schedule 2, item 88, section 823J of the Act]

2.62 The RBA may apply itself or jointly with ASIC for an injunction in relation to a provision under Part 7.3 of the Act. [Schedule 2, item 88, section 823U of the Act]

Resolution planning

2.63 It is at the discretion of the RBA to make a resolution plan for any CS facility licensee. The RBA may subsequently review, vary or revoke the resolution plan. [Schedule 1, item 35, section 827DB of the Act]

2.64 Resolution planning is important to crisis prevention by identifying potential barriers to orderly resolution.

Resolvability standards

2.65 The RBA has the power to set resolvability standards to ensure that domestic CS facility licensees and their related bodies corporate conduct their affairs in a way that would facilitate resolution of the domestic CS facility licensee if required. The RBA may assess domestic CS facility licensees and related bodies corporate against the standards. [Schedule 1, item 31, subsections 827DA(1) and (9) of the Act]

2.66 The resolvability standards may stipulate different requirements and activities to be complied with in different situations. [Schedule 1, item 31, subsection 827DA(4) of the Act]

Compliance by affected entities

2.67 The resolvability standards are to be complied with by all domestic CS facility licensees, related bodies corporate of a domestic CS facility licensee that are incorporated in Australia, or a specified class of CS facility licensees. The RBA will have the power to exempt specific CS facility licensees, classes of CS facility licensees or related bodies corporate. These entities may be exempt from all or part of the resolvability standards. [Schedule 1, item 31, subsection 827DA(2) of the Act]

2.68 Bodies corporate are to comply with the resolvability standards when they come into force which is either the day the determination of the standard is made or when that determination specifies commencement. The standards cease to apply when they are revoked. [Schedule 1, item 31, subsection 827DA(5) of the Act]

2.69 In the event of any conflict between the resolvability standards and any other rules, including the Financial Stability Standards, derivative transaction rules, derivative trade repository rules, CS services rules or CS facility rules, market integrity rules, the resolvability standards will prevail. [Schedule 1, item 31, subsection 827DA(8) of the Act]

2.70 A CS facility licensee is required to provide immediate notification to the RBA that it is likely to fail to comply with the standards. This obligation is the same as for the Financial Stability Standards. [Schedule 1, item 26, section 821BA of the Act]

Process of making standards

2.71 Prior to making the resolvability standards, the RBA must consult with affected bodies corporate and ASIC. The RBA may subsequently vary or revoke the standard where the RBA must follow a similar procedure to consult with ASIC and affected licensees. [Schedule 1, item 31, subsection 827DA(3), 6), (7) of the Act]

2.72 The resolvability standards are not subject to merits review. [Schedule 1, item 33 paragraph 1317C(gccj) of the Act]

Assessing compliance with resolvability standards

2.73 In addition to assessing compliance with the Financial Stability Standards, the RBA may assess how well a domestic CS facility licensee and its related bodies corporate are complying with their respective obligations under any resolvability standards that apply. In making this assessment, the RBA may take account of any information and reports it considers appropriate. [Schedule 1, items 29 and 30, subsection 823CA(1) of the Act]

2.74 Assessing compliance with resolvability standards is not intended to impose a recurring frequency, or to require a written report on the assessment to the Minister (noting this obligation will be removed under Schedule 3) and ASIC (or other person) or to publish (all or part of) a written report on an assessment

Resolvability standards to be a legislative instrument

2.75 The resolvability standards will be a legislative instrument for the purposes of the Legislation Act. The power of the RBA to set these standards will be similar to the existing provision for the RBA to set Financial Stability Standards in section 827D of the Act. [Schedule 1, item 31, subsection 827DA(1) of the Act]

2.76 The RBA's Financial Stability Standards are currently available on the RBA's website. To reflect the introduction of the resolvability standards, amendments are made to clarify that the Financial Stability Standards are a legislative instrument [Schedule 3, items 125 and 126 subsections 827D(1), (6), (7), (8), (9) and (10) ]

2.77 Subsections 56(2) and (3) of the Legislation Act requires legislative instruments to be published on the Gazette and will continue to apply. The amendment does not change the form of the Financial Stability Standards but is merely a technical amendment to provide clarity.

Power to require a report

2.78 The RBA is afforded powers to require body corporates to produce a special or expert report, depending on the circumstances. Given that ASIC and the RBA co-supervise CS facility licensees, they each have the power to request special and expert reports. ASIC and the RBA will aim to coordinate requests for a report to avoid duplication.

Power to require a special report

2.79 The RBA may give a CS facility licensee written notice requiring the licensee to give the RBA a special report on specified matters. [Schedule 2, item 87, subsection 823BA(1) of the Act]

2.80 The licensee must give the special report to the RBA within the time required by the notice. Failure to do so incurs a maximum penalty of 2 years imprisonment. [Schedule 2, items 87 and 93 subsection 823BA(2) and Schedule 3 of the Act]

2.81 The existing power for the Minister to require a special report on specified matters is formally transferred to ASIC, as detailed in Chapter 3.

Power to require an expert report

2.82 The RBA will be provided with the power to obtain an expert report. The power to obtain an expert report provides the RBA with timely and sufficient access to appropriate expertise from an independent source that will assist in fulfilling their oversight and supervision of CS facility licensees.

2.83 The RBA may appoint a person or require a CS facility licensee to appoint a person to provide an expert report on specified matters relating to the licensee and relevant to fulfilling the RBA's functions. The RBA must give notice of the appointment to the CS facility licensee. The CS facility licensee must give assistance to the appointed person preparing an expert report as reasonably required. [Schedule 2, item 87, subsection 823BC(1) and (6) of the Act]

2.84 If the appointed person requests the licensee to give them such information, explanation or assistance, the RBA may direct the licensee to comply with the request on a specified day.

2.85 Where the RBA appoints a person, written notice must be provided to the expert and a fee must be determined equal to the RBA's expenses in appointing and paying the expert to provide the report. The CS facility licensee will be responsible for the fee involved in appointing expert, which is payable to the RBA. [Schedule 2, item 87, subsection 823BC(1)and (7) of the Act]

2.86 Where the RBA directs a CS facility licensee to appoint a person to produce an expert report, the CS facility licensee is required to pay the expert directly. A person appointed to provide an expert report must be a person that has the necessary skills to provide a report on the specified matter and must be a person nominated or approved by the RBA (the RBA approves an expert appointed by the CS facility licensee). [Schedule 2, item 87, subsection 823BC(3) and (4) of the Act]

Contravention

2.87 Failure to comply with a requirement or give assistance is a criminal offence with a maximum penalty of 2 years imprisonment. [Schedule 2, items 87 and 93, subsections 823BC(5) and Schedule 3 of the Act]

Other powers

2.88 The RBA is afforded additional powers that mirror ASIC's existing powers, such as the power to compel a licensee to give the RBA access to a CS facility, and the ability to exempt licensees from certain obligations. These powers reflect the vital function the RBA has in oversight of CS facilities that contribute to financial system stability in Australia.

Obligation to give RBA access to the facility

2.89 The existing obligation to provide ASIC access to a CS facility under section 821D of the Act is extended to the RBA so that an authorised person of the RBA may also access the CS facility. [Schedule 2, items 81 to 83, section 821D of the Act]

2.90 Failure to provide access to the RBA attracts the existing penalty for failure to comply with the obligation to give ASIC access, being a maximum penalty of 2 years imprisonment. [Schedule 2, item 92, Schedule 3 of the Act]

Exemption

2.91 The RBA is empowered to exempt CS facilities from the obligation of a CS facility license to comply with the Financial Stability Standards and particular provisions of those standards.

2.92 The RBA may vary the exemption to impose additional conditions or revoke the exemption entirely. This power is extended so the RBA may exempt a particular related body corporate of a CS facility licensee, or a class of those related body bodies corporate.

2.93 The RBA may, in writing, vary an exemption. The purpose of varying the exemption may be to impose conditions or additional conditions, or to revoke or vary existing conditions on the exemption. The RBA may also extend or shorten the exemption duration. However, the RBA may only do this after providing the operator of the CS facility with notice and an opportunity to make submissions on the proposed action. The exemption may apply conditionally or unconditionally, and for a specified time or indefinitely. An exemption is not a legislative instrument.

2.94 If the RBA gives an exemption or varies or revokes an exemption, it must publish notice of the exemption, variation or revocation on the RBA's website. [Schedule 3, item 78, section 820CA of the Act]

Consequential amendments

2.95 The ALRC's recommendation to introduce a single definition has been adopted for updating the definition of the RBA. Amendments are made throughout Chapter 7 of the Act to accommodate this change. [Schedule 2, items 96 to 113, heading to section 828Q, sections 9 and 828Q, subsections 821C(3), 823C(3),827D(1), 828B(6), 828H(b), 828L(4), 901B(4), 901B(6) and 908BR(1), paragraphs 824B(2)(d), 827A(2)(h), 827A(3)(d), 828B(5)(b), 904B(2)(c) and 904D(1)(c), subparagraphs 828J(1)(b)(ii) and 901J(1)(b)(ii) of the Act]

2.96 The definition of restructuring is amended to specify that the general definition does not apply to a body corporate providing notification under section 821H of the Act. Restructuring is defined by reference to concepts which only apply for certain small business companies under Part 5.3B of the Act, which is not appropriate for body corporates providing notification under section 821H of the Act. [Schedule 1, item 56, 57, 58, and 59, section 9 definition of 'restructuring' in section 9 of the Corporations Act]

Commencement, application, and transitional provisions

2.97 The amendments that establish the crisis resolution powers and the crisis prevention powers in Schedule 1 and Part 9 of Schedule 2 to the Bill commence on the seventh day after Royal Assent.

Definition of restructuring

2.98 Given that the amendments to the definition of restructuring interact with the amendments under Treasury Laws Amendment (Delivering Better Financial Outcomes and Other Measures) Act 2024, three alternative commencement dates are included to ensure that regardless of whether that Bill commences, section 821H of the Act does not take the general definition of restructuring under section 9 of the Act. [Schedule 1, items 56, 57, 58, and 59, definition of 'restructuring' in section 9 of the Act]

Directions to reduce systemic risk

2.99 Given that the directions power to reduce systemic risk under section 823E of the Act is transferred from ASIC to the RBA, any directions that were issued by ASIC and in force before the commencement of Schedule 2 will continue in force as if the RBA had issued the direction. [Schedule 2, item 142, subsection 1705S(1) of the Act]

Chapter 3: Strengthening Australia's FMI regulatory framework - Enhancing and streamlining ASIC's licensing and supervisory powers

Outline of chapter

3.1 Schedule 2 to the Bill provides for new and enhanced regulatory powers in relation to FMI entities. Schedule 3 to the Bill transfers certain existing Ministerial powers relating to the licensing and supervision of CS facilities and financial markets to ASIC and the RBA.

3.2 Schedule 5 to the Bill makes related minor and technical amendments to the Corporations Act, ASIC Act and Insurance Act 1973.

3.3 All legislative references in this chapter are to the Corporations Act unless otherwise stated.

Context of amendments

3.4 The 2020 advice to Government concluded that regulators required additional supervisory and enforcement powers to most effectively monitor and manage the risks associated with FMI entities and promote the reliability and integrity of the markets that they support.

3.5 The 2020 advice to Government found that, currently, the Minister has operational powers that more appropriately sit with the regulators, while ASIC has powers that more appropriately sit with the RBA. Formally redistributing these powers will better distinguish the regulators' responsibilities from the strategic role of Government and align the regulators' powers with their respective mandates.

3.6 The amendments in Schedule 2 to the Bill strengthen the regulators' supervisory powers and broaden the range of enforcement tools they have available. This will give the regulators significantly more capacity to monitor the ongoing conduct of FMI entities, identify risks as they emerge, and take appropriate action to prevent those risks from escalating.

3.7 The amendments in Schedule 3 redistribute various Ministerial powers that are currently delegated by the Minister to ASIC under the Ministerial Powers (ASIC) Delegations 2021 in the primary law. CS facilities are co-regulated by ASIC and the RBA, and so the RBA has also received powers in relation to CS facility licensees.

3.8 The amendments introduced in this Bill ensure that the distribution of responsibilities is consistent with comparable regimes and international best practice.

Summary of new law

3.9 Schedules 2 and 3 to the Bill provide for the streamlining and enhancement of supervisory and licensing powers to promote financial stability and financial markets that are stable, fair, orderly and transparent.

3.10 The amendments in Schedule 2:

•

Introduce a requirement for domestic CS facility licensees to be registered under Chapter 2A of the Act;

•

ensure Ministerial approval is required for changes in control in all widely held market bodies, with such bodies being declared by ASIC; and

•

increase the threshold for the Minister needing to approve proposals to acquire from more than 15 per cent of the voting rights in a widely held market body to 20 per cent; and

•

implement a fit, proper, capable and competent standard for individuals performing certain roles or carrying out certain functions in licensed entities.

3.11 ASIC is provided with new powers to:

•

determine that a particular overseas financial market or CS facility has a material connection with Australia in order to provide certainty for all stakeholders about the scope of the Australian licensing regime;

•

request information about a financial market or CS facility operated by a body corporate related to considering if a connection with Australia is material;

•

take licensing action in a broader set of circumstances to safeguard the integrity of the licensing regime;

•

declare a financial market to be a declared financial market or a body to be a widely held market body;

•

require an expert report in relation to licensed entities;

•

make FMI banning orders against certain individuals who do not meet the fit, proper and competent standard;

•

approve proposals to acquire more than 20 per cent of the voting rights in a domestically incorporated licensee (other than a widely held market body); and

•

make rules (including emergency rules) in respect of operators of licensed CS facilities and participants in licensed CS facilities.

3.12 In addition, the amendments in Schedule 2 streamline some of ASIC's existing directions powers and remove the limit on the period during which certain directions issued by ASIC are effective.

3.13 Amendments that are primarily in Schedule 3 transfer certain supervisory and licensing powers that previously sat with the Minister (and are delegated to ASIC under the Ministerial Powers (ASIC) Delegations 2021) to ASIC, and in some circumstances, the RBA. These powers are outlined in the table below:

Transfer of the Minister's powers under Chapter 7

Comparison of key features of new law and current law

Table 3.1 Comparison of new law and current law

Detailed explanation of new law

Amendments relating only to CS facilities

Who may be granted an Australian CS facility licence

3.14 Currently, the Minister may grant Australian CS facility licences. These amendments transfer the power to grant CS facility licences to ASIC. The administrative process remains the same, where ASIC must be satisfied with the same criteria the Minister had to be satisfied under, and also have regard to the same matters in section 827A of the Act in deciding whether to grant a licence.

3.15 The amendments create a general licence condition for CS facility licences that if the licence was granted under subsection 824B(1) of the Act, the licensee must be a body corporate registered under Chapter 2A of the Act. Unless exempt, a CS facility licensee with a licence granted under subsection 824B(1) of the Act that is not registered under Chapter 2A of the Act contravenes the civil penalty provision under subsection 821A(2) of the Act.

3.16 Subsection 824B(3) of the Act, which contains the requirement that a foreign body corporate be registered under Division 2 of Part 5B.2 of the Act, is repealed and instead the requirement is retained as a general obligation in paragraph 821A(1)(e) of the Act.

3.17 The former requirement for the Minister to not grant a licence unless ASIC has notified the Minister that no disqualified individual is involved in the applicant, or 42 days have passed since the application was made and ASIC has not given a notice under 853D(2) of the Act to the applicant within that time period, is also repealed as it is redundant. It is no longer necessary as the power to grant CS facility licences has been transferred to ASIC, and ASIC will know if they have declared or propose to declare any disqualified individuals. For the same reasons, the equivalent provision under 795B(4) of the Act in relation to disqualified individuals, in the context of an Australian market licence, is also repealed. The transfer of power to grant an Australian market licence from the Minister to ASIC is discussed below in the section entitled 'Additional transferred powers'. [Schedule 2, items 1 to 12 and 127, sections 795B, 824B, subsection 821A(2) and paragraph 821A(1)(ea) of the Act]

CS facility rules

Power to make rules

3.18 The amendments provide ASIC with a power to make rules for the purposes of promoting the provision of fair and effective services by licensed CS facilities. Schedule 2 defines such rules as CS facility rules. [Schedule 2, items 62 and 65, sections 9 and 826H of the Act]

Application of the rules

3.19 The rules may impose obligations on both operators and participants of licensed CS facilities, as well as any other entities prescribed in the regulations. The application to participants reflects the key conduit for the provision of clearing and settlement to financial markets, and also of risk to the CS facility. However, the CS facility rules do not apply in relation to overseas CS facilities. [Schedule 2, item 65, section 826J of the Act]

Difference between CS services rules

3.20 The CS facility rules differ from CS services rules. CS services rules cannot impose requirements dealing with the activities, conduct and governance arrangements of CS facility licensees and associated entities, in relation to CS services, unless those services are of a type covered by a determination made by the Minister. Such a determination is intended only to be made for classes of CS services that meet certain criteria, particularly regarding the state of competition in the market for those services. CS facility rules are not constrained to the provision of certain services.

Exemption

3.21 ASIC or the Regulations may exempt a person or class of persons from all or specified provisions in Division 3A of the Act (establishing the rules), regulations made pursuant to the Division, or all of specified provisions of the CS facility rules. Exemptions by ASIC are made under the exemptions power in section 820C of the Act which is amended by the amendments in Schedule 2 (see paragraphs 3.80 to 3.86). Where there is a conflict between an exemption by the regulations and an exemption prescribed by ASIC, the exemption in the regulations prevails. [Schedule 2, items 57 and 65, sections 820C, 826T and 826U of the Act]

3.22 As the amendments empower ASIC to make CS facility rules, it is reasonable to enable ASIC to exempt persons or classes of persons from such rules. Although Division 3A of the Act establishes the rules, ASIC is responsible for their content and application. Therefore, it is well placed to determine if a person or class of persons should be exempt from their application in specific circumstances. ASIC's exemption power does not allow it to modify the effect of the legislation or the CS facility rules. It is only the ability to exclude or exempt certain persons or classes of person from its application.

3.23 The ability for the regulations to exempt or modify a specific class from the rules is consistent with sections 798L (relating to market integrity rules), 907E (relating to derivative trade repository rules) and 908EB of the Act (relating to the benchmark rules). Exemption by ASIC is consistent with the Minister and ASIC's power to provide exemptions with respect to financial markets under section 798M of the Act, derivative trade repositories under section 907D of the Act, and financial benchmark administrators under section 908EB of the Act. The exemption and modification by regulations power allows timely and efficient responses to market changes. [Schedule 2, items 65 and 67, sections 826U and 1317C of the Act]

Consultation and consent requirements

3.24 ASIC must not make a rule unless ASIC has:

•

consulted the public about the proposed rule;

•

consulted any other person or body as required by regulations; and

•

consulted the RBA. [Schedule 2, item 65, subsection 826M(1) of the Act]

3.25 Without limiting the ways in which ASIC may comply with the obligation to consult the public about the proposed rule, ASIC is taken to comply with that obligation if ASIC, on its website:

•

makes the proposed rule, or a description of the proposed rule, available; and

•

invites the public to comment on the proposed rule. [Schedule 2, item 65, subsection 826M(2) of the Act]

3.26 However, if ASIC fails to consult with the public, the RBA or any other person or body it does not invalidate the rule. This is because the CS facilities rules relate to regulating the entities that support the Australian financial system and affected entities require certainty to ensure that stability continues. Where a failure to meet procedural requirements would amount to jurisdictional error, the no invalidity provision do not prevent an entity from seeking judicial review under section 75(v) of the Constitution and section 39B of the Judiciary Act 1903. [Schedule 2, item 65, subsection 826M(3) of the Act]

3.27 ASIC must not make a rule without the Minister's consent, in writing, to the making of the rule. The RBA may provide advice to the Minister when ASIC seeks written consent from the Minister to make the rule. However, the consultation requirements and ministerial consent do not apply to variation or revocation pursuant to the Minister's direction to revoke or vary the CS facility rule due to inconsistency with other instruments. Schedule 2 clarifies that ministerial consent is not a legislative instrument within the meaning of subsection 8(1) of the Legislation Act to assist readers. [Schedule 2, item 65, section 826N of the Act]

3.28 ASIC may vary or revoke the rules in like manner and subject to like conditions (see subsections 33(3) and (3AA) of the Acts Interpretation Act 1901). But where the variation arises as a result of the direction of the Minister, consultation and ministerial consent requirements do not apply. [Schedule 2, item 65, section 826R of the Act]

Emergency CS facility rules

3.29 ASIC may make emergency rules without the consent of the Minister and without consulting the RBA, if ASIC is of the opinion that the rules are necessary, or in the public interest, to protect the Australian economy, the efficiency, integrity or stability of the Australian financial system, or the provision of fair and effective services by licensed CS facilities.

3.30 Where a rule is made in an emergency, consultation with the public or any other person or body as required by regulations is also not required. [Schedule 2, item 65, subsection 826P(1) of the Act]

3.31 Where emergency rules are made, ASIC must provide the Minister a written explanation of the need for the emergency rules the following day and comply with any direction from the Minister to vary or revoke the rule. The amendment that a direction from the Minister is not a legislative instrument is included to assist readers. [Schedule 2, item 65, subsections 826P(2), (3), (4) and (5) of the Act]

3.32 ASIC may make or vary a CS facility rule without consultation or consent if the Reserve Bank requests ASIC to make the rule or variation under subsection 849AB(1) of the Act. If ASIC does so, ASIC must provide the Minister with a copy of the request from the RBA. The minister may consider it appropriate to direct ASIC to revoke or vary the rule and ASIC must comply with that direction. A direction is not a legislative instrument and this amendment is included to assist readers. [Schedule 2, item 65, section 826PA of the Act]

Regulations may limit the rules to deal with certain matters

3.33 Regulations may prescribe limits on the extent to which the CS facility rules may deal with certain matters and the extent to which the rules may impose requirements on certain classes of persons. The environment in which CS facilities operate is susceptible to change. Prescribing the limits, certain matters and requirements in the regulations allow for timely responses to market conditions and offer flexibility and efficiency in appropriately regulating the market. [Schedule 2, item 65, section 826S of the Act]

Inconsistency between rules

3.34 In the event of any inconsistencies between the operating rules of a licensed CS facility or the operating rules of a financial market and the CS facility rules, the CS facility rules prevail over the operating rules to the extent of that inconsistency. [Schedule 2, items 63 and 64, paragraphs 793B(2)(aa) and 822B(2)(aa) of the Act]

3.35 In the event there is an inconsistency between the CS facility rules and the CS services rules, derivative transaction rules or the derivative trade repository rules, the CS facility rules prevail to the extent of the inconsistency. [Schedule 2, item 65, subsection 826K(1) of the Act]

3.36 In the event there is an inconsistency between a CS facility rule and a Financial Stability Standard, the Financial Stability Standard prevails to the extent of any inconsistency. [Schedule 2, item 66, subsection 827D(2A) of the Act]

3.37 However, if the RBA considers there is an inconsistency between a CS facility rule and a Financial Stability Standard, the RBA must refer the matter to the Minister. The Minister may, if appropriate, give ASIC a written direction to vary or revoke the CS facility rule. The amendments clarify that such a direction from the Minister is not a legislative instrument to assist readers. ASIC must comply with the direction. [Schedule 2, item 65, subsections 826K(2), (3), (4) and (5) of the Act]

3.38 As the CS facility rules are a legislative instrument, they will be subject to disallowance.

Compliance with the rules

3.39 Contravening the rules is a civil penalty under section 1317E of the Act. Relief from liability is available under section 1317S of the Act. [Schedule 2, items 65 and 68, the note to subsection 826J(1) and subsection 1317E(3) of the Act]

3.40 The regulations may allow for alternatives to civil proceedings for a person who is alleged to have failed to comply with the CS facility rules. The alternatives are limited to:

•

paying a penalty to the Commonwealth that is not more than 3,000 penalty units for individuals and 15,000 penalty units for a body corporate;

•

undertaking or instituting remedial measures (including education programs);

•

accepting sanctions other than the payment of a penalty to the Commonwealth; or

•

entering into a legally enforceable undertaking, which may include one or more of the following:

o

an undertaking to take specified action within a specified period;

o

an undertaking to refrain from taking specified action; or

o

an undertaking to pay a specified amount within a specified period to the Commonwealth or to some other specified person. [Schedule 2, item 65, section 826L of the Act]

3.41 Enforcement of CS facility operating rules is governed by section 822C of the Act. Minor amendments are made to that section to reflect the RBA's expanded role and to highlight that one or more persons or entities can apply to the Court in the event of non-compliance with or failure to enforce operating rules. A minor and technical amendment removes an erroneous and repetitive use of 'or' in the list of persons and entities who can make an application to the Court to improve readability of the Act. [Schedule 2, items 84, 85 and 86, subsection 822C(1) and paragraphs 822C(1)(a) to (c) of the Act]

3.42 The alternative to civil proceedings for noncompliance with CS facility rules by including regulation making power that enables a penalty to be set that may be a maximum of 3,000 for an individual or 15,000 penalty units for a body corporate. The explicit mention of the maximum penalty the regulations can prescribe is consistent with the Guide to Framing Commonwealth Offences.

3.43 The Guide to Framing Commonwealth Offences recommends maintaining consistency in the legislative framework with regards to penalties as much as is appropriate. Consistent with this principle, this compliance provision largely mirrors existing section 798K of the Act which applies to the enforcement of market integrity rules, section 901F of the Act which applies to enforcement of derivative transaction rules and section 903E of the Act which applies to enforcement of derivative trade repository rules. The significance of noncompliance with any of these rules and CS facility rules has the potential to adversely impact the financial system stability in Australia, which justifies the requirement for alternative compliance mechanisms in the Regulations.

3.44 The Attorney-General was consulted in relation to the inclusion of custodial penalties. Including the penalties in regulations are considered by the Federal Executive Council and are subject to disallowance by Parliament. This provides an additional layer of scrutiny and accountability. Therefore, the delegated offence in the Regulations is necessary and proportionate to the objective of ensuring compliance with the CS facility rules.

Reviewability of decisions

3.45 The following decisions are not subject to merits review:

•

a decision by ASIC to make CS facility rules, or to vary or revoke CS facility rules;

•

a decision by ASIC to do or not do anything under the regulations made for the purposes of allowing alternatives to civil proceedings;

•

a decision by the Minister to consent to the making of a CS facility rule, or to direct ASIC to vary or revoke a CS facility rule;

•

[Schedule 2, item 67, paragraphs 1317C(gccd), (gcce), (gccf) and (gccg) of the Act]

Amendments relating to financial markets and CS facilities

When is a financial market or CS facility taken to be operated in this jurisdiction

3.46 The amendments clarify the test that sets out the factors to consider when deciding whether an overseas market or CS facility falls within the Australian licensing regime, or in the words of the statute, is 'operated in this jurisdiction'. The intent of the amendments is to codify the current approach for determining whether an overseas financial market or CS facility falls within the Australian regulatory regime and therefore should be licensed as such.

3.47 Whether an overseas financial market or CS facility operates in Australia will be based on whether a body corporate is domestically incorporated under Chapter 2A of the Act or if ASIC declares that the financial market or CS facility has a material connection to Australia. [Schedule 2, items 138 and 139, sections 791D and 820D of the Act]

3.48 The amendments introduce a two-step test for ASIC to declare whether an overseas financial market or CS facility has a material connection with Australia. The first part of this test is an objective assessment of whether the market or CS facility has a connection to Australia. The second part of this test is consideration as to whether the connection to Australia is material. [Schedule 2, items 138 and 139, sections 791E and 820E of the Act]

3.49 ASIC may, by a written notice to a body corporate, request the body to give ASIC information about the financial market or CS facility within a period specified in the notice. [Schedule 2, items 138 and 139, subsections 791E(5) and 820E(4) of the Act]

3.50 ASIC can revoke a declaration if ASIC considers, having regard to the test, the financial market or CS facility does not have a connection to Australia, or if there is a connection, that the connection is not material. [Schedule 2, items 138 and 139, sections 791G and 820H of the Act]

Step 1: connection to Australia

3.51 The current licensing framework requires a financial market operator or CS facility operator to be licensed or exempt if the market or facility operates in Australia.

3.52 While prospective financial market and CS facility licensees do not need to apply for a declaration to apply for a licence, operators can determine whether they have a connection to Australia using the same respective test. In making a declaration, ASIC must consider whether a market or CS facility has a connection with Australia, which is based on the entity:

•

having operations in Australia;

•

providing a market or services in respect of Australian financial products;

•

having at least one current or expected Australian market or CS facility participant;

•

having additional kinds of connections that one or more specified kinds of financial markets or CS facilities may have with Australia, as determined by ASIC. [Schedule 2, items 138 and 139, subsections 791E(1) and (2) and 820E(1) and (2) and paragraphs 791E(4)(a) of the Act]

3.53 In addition to these common factors, there are certain kinds of connections that are specific to the type of entity. For financial markets, this additional criterion is based on targeting Australian investors. For overseas CS facilities, this is based on whether there is a relevant connection with the Australian market infrastructure, which will arise if the overseas CS facility has entered into an arrangement with an Australian market licensee, an Australian CS facility licensee or with the operator of a payments system determined by the RBA (see paragraph 3.54). [Schedule 2, items 138 and 139, paragraphs 791E(2)(e) and 820E(2)(e) of the Act]

3.54 When making the relevant determination in relation to a payment system for the purposes of the test, the RBA must have regard to whether:

•

the aggregate value of Australian dollar payments processed through the system is high relative to other payment systems;

•

the system mainly handles time-critical or high-value payments;

•

the system is used to settle payments in other CS facilities; and

•

the system is location in Australia.

3.55 Regulations may also prescribe other matters the RBA must consider in making a determination. [Schedule 2, item 139, subsections 820F(1) and (2) of the Act]

3.56 The Minister must consent in writing to the making of such a determination before it can be made. A consent is not a legislative instrument. This is included to assist readers. [Schedule 2, item 139, subsections 820G(1) and (3) of the Act]

3.57 ASIC may determine additional connections financial markets or CS facilities may have with Australia by legislative instrument.

3.58 A determination may also outline matters that show when connections are material and may determine principles for working out how the matters would apply to a financial market or CS facility. However, the Minister must consent in writing to the making of such a determination before it can be made.

3.59 A consent is not a legislative instrument. This is included to assist readers. [Schedule 2, items 138 and 139, subsections 791E(4), 820F(2), 820G(2) and (3) and section 791F of the Act]

Step 2: materiality of the connection

3.60 The second part of the test requires ASIC to consider whether the connection is material. This is a subjective test that follows the objective test of determining whether the overseas financial market or CS facility has a connection with Australia. Under the second limb of the test, ASIC must determine the materiality of the connection by reference to criteria. The criteria assist ASIC in determining if the operations of the overseas financial market or CS facility have or may have implications for the safe and effective functioning of the Australian financial system or the confident, fair and effective dealings in financial products by Australian investors.

3.61 For financial markets, ASIC may declare, after applying any principles outlined in a determinations (explained above) that an overseas financial market's connection with Australia is material if the size and extent of the current or expected aggregate activity in the market of participants in that market is material to:

•

the risk management activities of those participants (a participant includes a user that has direct access to a market or facility and that access is not reliant on an intermediary);

•

the efficient allocation of capital or liquidity to the Australian economy;

•

the provision of fair, orderly and transparent financial markets to those participants, and users, who have a connection with Australia;

•

confident and informed decision making by consumers of financial products or financial services who have a connection with Australia; or

•

any additional matters outlined in a determination. [Schedule 2, item 138, subsection 791E(3) of the Act]

3.62 For CS facilities ASIC may make a declaration that an overseas CS facility's connection is material if:

•

there is a material number of current or expected Australian participants or users of the facility;

•

the size and extent of current or expected aggregate activity of Australian participants or users of the facility is material to the risk management activities of those participants or users or to the efficient allocation of capital or liquidity to the Australian economy; or

•

the overseas CS facility's arrangement with an Australian financial market, an Australia CS facility or relevant payment systems operator is material;

•

any other matters outlined in a determination apply. [Schedule 2, item 139, subsection 820E(3) of the Act]

Referrals to the Minister

3.63 If a financial market of CS facility receives a declaration from ASIC that they have a material connection to Australia, the financial market or facility may, in writing, request that ASIC refer the declaration to the Minister. ASIC must refer the declaration immediately.

3.64 After receiving such a referral, if the Minister considers it appropriate, the Minister may direct ASIC to vary or revoke the declaration. ASIC must comply with that direction. Such a direction is not a legislative instrument, that provision is included to assist readers. [Schedule 2, items 138 and 139, subsections 791D(4), (5), (6) and (7) and 820D(3), (4), (5) and (6) of the Act]

3.65 Decisions by ASIC to declare a financial market or CS facility to have a material connection to Australia, determine connections, matters or principles are not merits reviewable. This is because a referral to the Minister is the appropriate method of review as the connection and materiality factors operator with respect to entities that are or may be systemically significant to the Australian financial system. A decision by the Minister to consent to the making of a determination is similarly not merits reviewable. [Schedule 2, items 140 and 141, paragraphs 1317C(gcaa), (gcab), (gcac), (gcca), (gccb) and (gccc)]

Declared financial markets and widely held market bodies

Declared financial markets

3.66 The current definition of prescribed financial market is repealed and replaced with a new definition of the expression declared financial market which has been added to the glossary in section 9 of the Act. [Schedule 2, items 23 and 24, section 9 of the Act]

3.67 A declared financial market is a financial market that is specified in a declaration made by ASIC.

3.68 A declaration is a legislative instrument and ASIC must not make a declaration unless the Minister has approved it in writing. A decision by ASIC to declare a financial market is not reviewable. [Schedule 2, items 25 and 26, section 9D and subsection 1317C(c) of the Act]

3.69 A declared financial market will attract the same statutory obligations as a formerly prescribed financial market. Formerly prescribed financial markets will be deemed to be declared financial markets on commencement of Schedule 2, as described further in paragraph 3.206.

3.70 Empowering ASIC to declare that a market is a declared financial market, rather than having to prescribe through regulations, will enable ASIC to more readily and efficiently declare a financial market as a declared financial market, therefore reducing the potential for delay of related licence applications or variations.

3.71 Minor amendments have also been made to change references from prescribed financial market to declared financial market in the Act, the Bankruptcy Act 1966 and the PPSA. [Schedule 2, items 27, 28 and 29, various provisions of the Act, subsection 5(1) of the Bankruptcy Act 1966 and section 49 of the PPSA]

Widely held market bodies

3.72 Widely held market bodies are subject to certain requirements with respect to ownership and voting power.

3.73 A body corporate is a widely held market body if the body is a market licensee or the holding company of such a licensee, or a CS facility licensee or the holding company of such a licensee and is specified in an ASIC declaration. [Schedule 2, item 31, subsection 850A(2) of the Act]

3.74 ASIC may declare a market licensee, CS facility licensee or a holding company of such licensee to be a widely held market body provided there is consideration of the market or CS facility with regard to:

•

the significance to the national economy of the functions performed by the financial market or CS facility;

•

the size and importance in the context of the Australian financial market or CS facility within the Australian financial services industry and relative to other operations providing a similar service or function;

•

the degree of or potential for competition between the financial market or CS facility and other already prescribed financial markets or CS facilities; and

•

any other relevant matters. [Schedule 2, item 31, subsection 850A(4) of the Act]

3.75 These declarations by ASIC are legislative instruments and are subject to disallowance by Parliament. In addition, the declaration in relation to widely held market bodies and declared financial markets may only be made if the Minister provides written approval. This ensures there is sufficient parliamentary oversight surrounding ASIC's ability to declare 'declared financial markets' and 'widely held market bodies'. [Schedule 2, items 25 and 31, section 9D, subsections 850A(1), 850A(3) and 850A(5) of the Act]

3.76 Further, the amendments remove references to bodies 'specified in regulations' and replaces it with 'specified in a declaration' in relation to widely held market bodies to reflect that widely held market bodies are only specified in declarations by ASIC. The language 'contravention of previous law' is also removed as the term is no longer in use. The provision is reframed to reflect the changes. [Schedule 2, items 32, 33 and 34, section 851I of the Act]

3.77 A decision by ASIC to declare a body corporate as a widely held market body is not reviewable. [Schedule 2, item 35, paragraph 1317C(gdaa) of the Act]

3.78 The amendments amend the definition for widely held market body in the glossary in section 9 of the Act to reference the updated provision. [Schedule 2, item 30, section 9 of the Act]

New matters to be taken into account by ASIC in respect of an overseas CS facility licence

3.79 When deciding whether to grant, suspend or cancel a licence, or impose, vary or revoke conditions on an overseas CS facility licence, ASIC must consider the adequacy of the arrangements in place relating to the governance and operation of the CS facility. ASIC must consider the adequacy of these arrangements with respect to their impact on Australian financial system stability, the fair and effective provision of the CS facility licensee's services and public confidence and integrity in Australia (note the powers to grant a licence, impose, vary or revoke conditions or suspend or cancel a licence are transferred to ASIC in Schedule 3 to the Bill – see paragraph 3.162). [Schedule 2, item 61, paragraph 827A(3)(e) of the Act]

Broadening the existing exemptions power

3.80 The exemptions power is broadened to provide certainty that an exemption could be provided to particular operators. ASIC may exempt a financial market or class of financial markets, a CS facility or class or CS facilities, or a person or class of persons from all or specified provisions of Parts 7.2 and 7.3 of the Act respectively. [Schedule 2, items 53 and 57, sections 791C and 820C of the Act]

3.81 As it does currently, an exemption may apply unconditionally or subject to specified conditions. The amendments introduce the term exemption duration to clarify that an exemption may apply for a specified period or indefinitely. [Schedule 2, items 53 and 57, subsections 791C(2) and (8) and 820C(2) and (8) of the Act]

3.82 An exemption for a particular financial market, CS facility or person is not a legislative instrument, but ASIC must publish the exemption on its website and merits review is available for an action by ASIC with respect to the exemption.

3.83 An exemption for a class of financial markets or CS facilities is a legislative instrument and therefore merits review is not available, however the instrument is subject to disallowance by the Parliament. [Schedule 2, items 53 and 57, subsections 791C(1), (5), (6), (7) and (9) and 820C(1), (5), (6), (7) and (9) of the Act]

3.84 ASIC may vary an exemption at any time to impose conditions, vary or revoke conditions, or extend or shorten the exemption duration. ASIC must however give notice and an opportunity to the affected entity or entities to make submissions. For a particular financial market, CS facility or person, a variation is not a legislative instrument but ASIC must publish the variation on its website. Merits review is available with respect to a decision in relation to a variation of this type of exemption. For a class of financial markets, CS facilities or persons, a variation must be done by legislative instrument. Merits review is not available; however the instrument is subject to disallowance by the Parliament. [Schedule 2, item 53 and 57, subsections 791C(3), (4), (5), (6), (9) and (10)and 820C(3), (4), (5), (6), (9) and (10) of the Act]

3.85 ASIC may not exempt a CS facility from complying with the Financial Stability Standards, the resolvability standards or the obligation to do all things necessary to reduce systemic risk that are practical to do. The RBA has the power to make these exemptions (see paragraphs 2.91 to 2.94). [Schedule 2, item 57, subsection 820C(11) of the Act]

3.86 Consequently, the amendments update other references to the exemption to clarify that a person can be exempt from the operation of Parts 7.2 and 7.3 of the Act. [Schedule 2, items 51, 52, 55 and 56, paragraphs 791A(1)(c) and 820A(1)(c), and subsections 791B(ca) and 820B(d) of the Act]

3.87 Section 761H of the Act operates so that a reference to 'provisions of this Part' include regulations and instruments made under the Part. This means that along with the power to exempt a person or persons from particular provisions of the primary law, ASIC can also exempt a person or persons from particular provisions of instruments made under the Parts 7.2 and 7.3 of the Act.

Amendments relating to financial markets, CS facilities, derivative trade repositories and financial benchmark administrators

Increases in voting power

Widely held market bodies

3.88 Currently for a person to hold more than 15 per cent voting power in a widely held market body:

•

for ASX Limited – the person does not need to apply for approval, rather the regulations may prescribe a higher percentage than the 15 per cent voting power limit in ASX Limited that a person can have;

•

for a widely held market body other than the ASX Limited – the person must lodge an application with ASIC where the Minister may approve that application if the Minister is satisfied that it is in the national interest.

3.89 The separate arrangements for a higher ownership in ASX Limited are repealed and aligned with the process for widely held market bodies. This means if a person seeks to exceed the voting power limit in any widely held market body including the ASX Limited, an application must be lodged with ASIC to increase the voting power and that application is subject to ministerial approval. Regulations may not prescribe a higher percentage in relation to the ASX. [Schedule 2, items 36, 37, 38 and 39, subsections 850B(1) and 851A(1) of the Act]

3.90 The voting power threshold that would trigger a need for a person to have that voting power to be approved by the Minister is increased to 20 per cent in order to be consistent with the arrangements for controlled Australian financial bodies (see below). [Schedule 2, items 45 to 50, the headings of Subdivisions A and B of Division 1 of Part 7.4, section 851A, paragraphs 850B(1)(a) and 853(b) of the Act]

3.91 The obligation to notify ASIC of certain matters in section 792B of the Act is updated so that a market or CS facility licensee that becomes aware that a person has come to have, or has ceased to have, a voting power that exceeds voting power of 20 per cent in the licensee, or holding company of the licensee, must notify ASIC. This obligation applies to all licensees, including non-widely held market bodies and foreign licensees. [Schedule 2, item 44, paragraphs 792B(5)(b) and 843D(4)(b) of the Act

ASIC approval – all other FMI domestic bodies corporate

3.92 ASIC approval is required prior to a person holding more than 20 per cent voting power in a body corporate registered under Chapter 2A of the Act that is a market licensee, a CS facility licensee, a derivative trade repository licensee or a benchmark administrator licensee or holding company (other than a widely held market body).

3.93 A number of terms are introduced to assist in approving an application to hold more than 20 per cent voting power, including a controlled Australian financial body, unacceptable control situation (in relation to a controlled Australian financial body), and passes the legitimate control test:

•

'controlled Australian financial body' is a body that is registered under Chapter 2A of the Act, is not a widely held market body, and is any of the following:

o

a market licensee;

o

a CS facility licensee;

o

a derivative trade repository licensee;

o

a benchmark administrator licensee; or

o

a holding company of the any of the above licensees.

•

An 'unacceptable control situation' exists in relation to a controlled Australian financial body and a particular person if the person's voting power in the body is more than 20 per cent or an approved higher percentage.

•

a person 'passes the legitimate control test' for having a particular percentage of voting power in a controlled Australian financial body unless it is reasonable to expect that the person's having of that percentage of voting power in the body would adversely affect the relevant licensee's ability to meet one or more of its obligations. [Schedule 2, items 40 to 42, sections 9, sections 852DA, 852DB and 852DC of the Act]

3.94 A person may apply for approval to have voting power of more than 20 per cent by lodging an application in the prescribed form with ASIC that sets out:

•

the percentage of voting power (if any) the person currently has in the body;

•

the percentage of voting power the person intends to have in the body;

•

the period the person is seeking the approval for (including whether indefinite or not); and

•

the person's reasons for making the application.

3.95 This application must be in the prescribed form. [Schedule 2, item 42, section 852DG of the Act]

3.96 If information contained in an application is incorrect or ceases to be correct after the application is made, the applicant must, as soon as practicable after the applicant becomes aware of that fact, give ASIC the correct information in writing. Failure to correct this information is an offence with a penalty of 2 years imprisonment. [Schedule 2, items 42 and 43, section 852DQ and Schedule 3 of the Act]

3.97 ASIC must give approval to an applicant if ASIC is satisfied that:

•

it is not reasonable to expect that the proposed ownership arrangement would adversely affect the body's ability to meet one or more of its obligations under the Act; and

•

the information, or updated information, provided in the application is correct.

3.98 Written notice must be provided to both the applicant and the body corporate registered under Chapter 2A of the Act, notwithstanding whether ASIC approves or refuses to approve an application. A decision by ASIC with respect to an application is subject to merits review. [Schedule 2, item 42, sections 852DC and subsections 852DH(1) and (3) of the Act]

3.99 If ASIC approves an application, the notice must specify the period that the approval is in force. The duration of the approval as specified in the notice may be indefinite. A person may apply to extend that approval by lodging an application with ASIC in the same manner as the initial application (or ASIC can extend on its own initiative). [Schedule 2, item 42, subsections 852DH(2), sections 852DJ and 852DK and subsection 852DM(4) of the Act]

3.100 ASIC has 90 days to make a decision on an application and may, by written notice given to the applicant, extend this period by up to 30 days. Approval is deemed to have been granted outside of that period. [Schedule 2, item 42, subsections 852DR(1), (2) and (4) of the Act]

3.101 ASIC may request further information about an application and may refuse to consider an application until the applicant gives ASIC the information. The time limit for ASIC's decision does not apply whilst this occurs. The time limit for ASIC's decision also does not apply if an unacceptable control situation exists at any time before ASIC decides the application. [Schedule 2, item 42, section 852DP and subsections 852DR(3) and (5) the Act]

3.102 ASIC may vary or revoke the notice of approval. In the case of a variation, ASIC may increase or decrease the percentage or duration. The variation or revocation is in force at the time specified in the notice, which must be at least 90 days after the notice is given. [Schedule 2, item 42, section 852DM and 852DN of the Act]

3.103 The notice may also specify that the approval is subject to conditions. ASIC may impose, vary or revoke conditions after approval by written notice. The power is exercisable on ASIC's own initiative or by application. [Schedule 2, item 42, section 852DL of the Act]

Contravention provisions

3.104 It is an offence for a person to acquire shares in a body corporate where acquisition would result in an unacceptable control situation. The penalty for the offence provision is 400 penalty units. [Schedule 2, items 42 and 43, section 852DD and Schedule 3 to the Act]

3.105 A person who holds an approval to increase voting power must give written notice to ASIC if they become aware that they have breached a condition to which the approval is subject. Failure to do so is an offence of 200 penalty units. [Schedule 2, items 42 and 43, subsection 852DL(6) and Schedule 3 to the Act]

3.106 The Court has the power to make remedial orders or grant injunctions where an unacceptable control situation exists. This power is intended to enforce the voting control limits for licensed bodies. The Court may only make such orders on an application by ASIC, the body, or a person that has any voting power in the body. The power to apply for an injunction under these provisions does not limit the power to apply for an injunction under section 1324 of the Act. [Schedule 2, item 42, sections 852DE and 852DF the Act]

3.107 To the extent that the Court order under 852DE would result in an acquisition of property from a person otherwise than on just terms within the meaning of section 51(xxxi) of the Constitution, the relevant provision will not have any effect. [Schedule 2, item 42, section 852DS the Act]

3.108 ASIC's ability to give anti-avoidance directions mirrors the Minister's ability to give anti-avoidance directions in section 852B of the Act. Failure to comply with such a direction is an offence of 400 penalty units. [Schedule 2, items 42 and 43, section 852DT and Schedule 3 to the Act]

FMI banning orders

Considerations in making a banning order

3.109 The defined terms of FMI banning order and FMI licensee are inserted into the dictionary for the purposes of the banning order provisions. An FMI Banning order is an order made under subsection 853H(1) of the Act. An FMI licensee is a market licensee, CS facility licensee, derivative trade repository licensee, or a benchmark administrator licensee as defined in the Act. [Schedule 2, item 134, definition of 'FMI banning order' and 'FMI licensee' in section 9 of the Act]

3.110 A core officer is a person covered by paragraphs (a) and (b) of the definition of officer, that is a director or alternate director of a corporation, or a person commonly known as a shadow director of a corporation. [Schedule 2, items 121, definition of 'core officer' in section 9 of the Act]

3.111 The amendments authorise ASIC to make a banning order against an individual if:

•

the individual becomes an insolvent under administration;

•

the individual is convicted of fraud;

•

ASIC has reason to believe that the individual is not a fit and proper person, or that the individual is not adequately trained or is not competent to perform a function of a core officer of or control a licensee;

•

ASIC has reason to believe the individual is not adequately trained or not competent to perform as a core officer or control a licensee.

•

has not complied with financial services law or ASIC has reason to believe that they are likely to contravene financial services law;

•

has been involved in the contravention of a financial services law by another individual or ASIC has reason to believe that they are likely to become involved in such a contravention; or

•

has been a core officer of one or more corporations unable to pay its debts within the last 7 years. [Schedule 2, item 135, sections 853H, 853L and 853M of the Act]

3.112 In determining whether an individual is not fit and proper, ASIC must have regard to certain matters including (but not limited to) whether the individual:

•

has ever been a core officer of an Australian market licensee, Australian CS facility licensee, Australian derivative trade repository licensee or benchmark administrator licensee that has had its licence suspended or cancelled;

•

has ever had a banning order or a disqualification order made against the person;

•

is disqualified from managing corporations;

•

has ever been insolvent under administration;

•

if the individual has been banned from engaging with a credit activity under a State or Territory law;

•

whether the individual has ever been linked to a refusal or failure to give effect to a determination made by AFCA;

•

has been convicted of an offence within the last 10 years (Part VIIC of the Crimes Act 1914 applies so ASIC cannot consider spent convictions); or

•

any other matters prescribed by regulation. [Schedule 2, item 135, section 853K of the Act]

3.113 An individual contravenes financial services law if they fail to comply with a duty imposed under the law. It does not matter if the provision imposing a duty that has not been complied with is neither an offence nor a civil penalty provision. [Schedule 2, item 135, section 853L of the Act]

Making a banning order

3.114 ASIC may make an FMI banning order that applies for a specified period or indefinitely. ASIC may specify the individual is prohibited from:

•

controlling a licensee, either alone or in concert;

•

performing any function involved in a licensee including as a manager, employee, contractor or in some other capacity; or

•

performing specified functions involved in a licensee including as a manager, employee, contractor or in some other capacity. [Schedule 2, item 135, subsections 853N(1) and (2) of the Act]

3.115 However, ASIC may expressly allow individuals to do certain actions in certain circumstances by including this in the terms of the banning order. [Schedule 2, item 135, subsection 853N(3) of the Act]

3.116 ASIC may only make a banning order against an individual after giving the individual an opportunity to appear at a hearing before ASIC that takes place in private and to make submissions to ASIC on the matter. If ASIC makes a banning order without giving the individual these opportunities, ASIC must rely on the following grounds:

•

the person is not a fit and proper person because the person has been a core officer of the entity that has had a licence suspended or cancelled; or

•

the individual has been convicted of serious fraud. [Schedule 2, item 135, section 853J of the Act]

3.117 ASIC may vary or cancel a banning order on its own initiative or on application. A variation or cancellation may occur if ASIC is satisfied there has been a change in the circumstances since the original banning order. [Schedule 2, item 135, section 853Q of the Act]

3.118 An FMI banning order, variation or cancellation takes effect when it is given to in individual. ASIC must give the individual written notice of the banning order being made, varied, or cancelled, accompanied with a statement of reasons. The notice takes effect from when it is provided to the individual. [Schedule 2, item 135, subsections 853H(2), 853R(1) and sections 853Q and 853S of the Act]

3.119 ASIC must publish a notice on its website as soon as practicable after making or varying the order. The notice must state when the order takes effect and attaching a copy of the FMI banning order. However, ASIC considers it appropriate, a summary of permissible specified acts may be published instead. [Schedule 2, item 135, subsections 853R(2), (2A) and (3) of the Act]

Contravention of banning order

3.120 An individual who is subject to a banning order must not engage in conduct that would breach the banning order.

3.121 An individual who breaches a banning order commits an offence with a penalty of 5 years imprisonment. [Schedule 2, item 137, subsection 853P(2) and Schedule 3 to the Act]

3.122 A civil penalty is also available with respect to an individual who breaches a banning order. [Schedule 2, item 136, subsections 853P(3) and 1317E(3)]

3.123 This is justified on the basis that involving banned individuals in market licensees may have detrimental effects on the stability of the financial system.

Relation to general licence obligations

3.124 It is a general licence obligation for a licensee to take all reasonable steps to ensure that no individual against whom an FMI banning order is made becomes or remains involved in a licence or does any of the things prohibited under the banning order in relation to the licensee. Regulations may prescribe any additional steps domestic CS facility licensees, market licensees, derivative trade repository licensees, or benchmark administrator licensees must take for the purposes of ensuring that each individual performing the role of a core officer of the licensee is fit, proper, capable and competent for the role. [Schedule 2, items 122 to 126 and 129 to 133, paragraphs 792(1)(ha) to (i), 821A(1)(ga) to (h), 904A(1)(ba) to (c) and 908BP(b) to (c) of the Act]

3.125 ASIC may make a declaration disqualifying individuals involved in a market licensee, CS facility licensee, derivative trade repository licensee or benchmark administrator licensee if ASIC is satisfied the individual is unfit to be involved in the licensee. ASIC must consider matters such as the individual's fame, character and integrity in deciding whether the individual is unfit. Previously, ASIC also needed to be satisfied that, because of the individual's unfitness, there was a risk that the licensee would breach its obligations under Chapter 7 of the Act. [Schedule 2, item 128, subsections 853C(2) and (3) of the Act]

Dealing with licences that are not being used

Suspending or cancelling a licence

3.126 Schedule 2 clarifies the circumstances where a licence can be suspended or cancelled. The table below provides a summary of certain grounds for which a licence may be cancelled or suspended (however, there remain other grounds under sections 797B, 826B, 905H and 908BI of the Act).

[Schedule 2, items 13 to 22, sections 797B, 826B, 905H and 908BI of the Act]

3.127 ASIC is transferred the Minister's power to immediately suspend or cancel an Australian market licence or CS facility licence, currently delegated to ASIC under the Ministerial Powers (ASIC) Delegations 2021. The transfer of power is discussed below in the section entitled 'Additional transferred powers'.

3.128 One of the new grounds in relation to overseas financial markets and CS facilities is that ASIC may suspend the licence for a specified period or cancel it if the cooperation (including information sharing) between ASIC, the RBA and the authority or authorities responsible for supervising the operation of that facility in that country has materially deteriorated or is otherwise inadequate. [Schedule 2, items 15 and 18, paragraphs 797B(d)(iii) and 826B(d)(iii) of the Act]

3.129 Including this new ground for immediate suspension or cancellation is intended to ensure appropriate oversight over licensed entities. Adequate information sharing between domestic and overseas regulators is essential to the effective functioning of Australia's licensing regime for overseas financial markets and CS facilities. Cooperation between ASIC, the RBA and the authority or authorities responsible for supervising the operation of that facility overseas minimises the potential for regulatory gaps and duplication and allows ASIC and the RBA to monitor the regulatory equivalence of an entity's home regime.

3.130 A power to suspend or cancel a licence after it has not been used for 12 months after the license was granted is included due to the risk that a body corporate could change substantially if given more time to begin operating, such that by the time it does begin operating the original grounds for granting the licence may no longer apply. It is appropriate that ASIC has the ability to deal with this circumstance. [Schedule 2, items 13, 16, 19 and 21, subsections 797B(a) to (ab), 826B(a) to (ab) and 905H(a) to (ab), and paragraphs 908BI(1)(aa) to (ab) of the Act]

3.131 If an application has been made to deregister the licensee as a company by the licensee or a liquidator of the licensee, or ASIC initiates a deregistration of the licensee company, ASIC may suspend or cancel the license. The license can be suspended immediately on application or initiation despite the 2-month notice requirement prior to deregistration taking effect. This is appropriate for FMI due to their centrality in ensuring financial market stability and function. [Schedule 2, items 14, 17, 20 and 22, subsections 797B(ca) to (cb), 826B(ca) to (cc) and 905H(ca) to (cb), and paragraphs 908BI(1)(ca) to (cb) of the Act]

Streamlining ASIC's direction powers

3.132 The amendments streamline ASIC's power to issue directions for Australian market licensees, CS facility licensees, and derivative trade repository licensees, so that a direction can be issued without advising the relevant licensee of an intention to issue a direction. [Schedule 2, items 69 to 72, subsections 794D(1), 798J, 823D(1) and 904G(1) of the Act]

3.133 The streamlined process for issuing directions enables ASIC to address issues in an efficient and timely manner. The direction may specify the licensee to undertake a particular action or direct them to refrain from undertaking a particular action.

3.134 The purposes for issuing a direction remain the same, however, the time limit to comply has been removed. This is justified on the basis that it impedes ASIC's ability to use its directions power in circumstances that may take longer than 21 days to resolve. Instead, ASIC must specify a reasonable time period on the direction that the licensee must comply with the direction. The direction will either cease at the time specified on the direction, or when ASIC revokes the direction, whichever is earlier. [Schedule 2, items 69 to 72, subsections 794D(2), 798J(2), 823D(3) and 904G(2) of the Act]

3.135 Consistent with the current directions power, Australian market licensees, CS facility licensees and derivative trade repository licensees must comply with a direction issued by ASIC. The penalty for failing to comply is the same as currently listed in Schedule 3 of the Act, being 100 penalty units for each day of noncompliance for an individual and ten times this amount for a body corporate. Where a licensee fails to comply with the direction, ASIC may apply to the Court for a Court order to compel the licensee to comply. [Schedule 2, items 69 to 72, 78 and 79, subsections 794D(3) and (4), 798J(3) and (4), 823D(4) and (5) and 904G(3) and (4) and Schedule 3 to the Act]

Referrals to the Minister

3.136 Australian market licensee, CS facility licensee and derivative trade repository licensees retain the ability to refer a direction to the Minister after ASIC issues the direction. The Minister will continue to hold the power to require ASIC to revoke or vary a direction which ASIC must comply with. [Schedule 2, items 69 to 72, sections 794DA, 798JA, 823DA and 904GA of the Act]

3.137 The Minister's request is not a legislative instrument within the meaning of subsection 8(1) of the Legislation Act. The subsection is merely included to provide clarity and assist readers.

3.138 As soon as possible after a direction has been issued, varied or revoked as a result of the Minister's request, ASIC must give notice to:

•

in the case of a market licensee: the operator of each CS facility with which the market licensee has clearing and settlement arrangements for transactions; or

•

in the case of a CS facility licensee: to the operator of each financial market with which the facility has arrangements to provide services, each issuer of financial products (if the direction relates to specified financial products) and the RBA;

•

in the case of a derivative trade repository licensee: the operator of each financial market and CS facility with which the licensed derivative trade repository licensee has arrangements to provide services relating to derivative trade data. [Schedule 2, items 69, 71 and 72, subsections 794DA(6), 823DA(6) and 904GA(6) of the Act]

3.139 The ability for a licensee to refer a direction to the Minister does not affect a licensee's obligation to comply with the direction. The licensee must continue to comply with the direction whilst the matter is referred, and the Minister is considering the request.

Merits review

3.140 A direction from the Minister for ASIC to vary or revoke a direction is not a reviewable decision. [Schedule 2, items 75 to 77, paragraphs 1317C(gcae), (gccd) and (gdcaa) of the Act]

Transferred directions power

3.141 The Minister's power to issue directions to licensees not complying with the licensee obligations is transferred to ASIC. This is to equip ASIC with the necessary enforcement powers to ensure compliance with licence obligations. ASIC may issue directions to a market licensee or a CS facility licensee where ASIC considers the licensee is either unlikely to, or is not, complying with the licensee obligations.

3.142 ASIC is directly responsible for issuing the following directions to licensees to promote compliance with the licensee obligations under Chapter 7 of the Act, including:

•

the power to issue, vary, or revoke directions with respect to financial markets under Part 7.2 of the Act; [Schedule 3, items 10 to 14, section 794A of the Act]

•

the power to issue, vary, or revoke directions based on CS facility licensees' obligations under Part 7.3 of the Act; and [Schedule 3, items 77 to 80, section 823A of the Act]

•

the power to issue directions with respect to compensation arrangements of licensed financial markets. [Schedule 3, item 141 to 143, section 882D of the Act]

3.143 Consistent with the ability for licensees to refer directions to the Minister, a market licensee that has received a direction from ASIC may request ASIC to refer the matter to the Minister. ASIC must comply with this request and comply with any requirements the Minister may make, including not making, varying or revoking the direction. [Schedule 3, items 81 and 144, subsections 823A(5) and 882D(5) of the Act]

Matters relating to ASIC and RBA directions issued to CS facility licensees

3.144 If an officer of a CS facility licensee fails to take reasonable steps to ensure the licensee is complying with a direction given by ASIC or the RBA, or complying with the obligation to give assistance with respect to an expert report, the officer is liable for an offence. The penalty is 100 penalty units for each day the officer is not taking such steps. The days need not be consecutive. [Schedule 2, items 88 and 94, section 823W and Schedule 3 of the Act]

3.145 If a body corporate is subject to the exercise of a power under Part 7.3 of the Act by the RBA or if the body corporate is a member of a group of bodies corporate subject to that exercise of power, a party to an agreement with this body corporate cannot:

•

deny an obligation or accelerate any debt under the agreement;

•

terminate or close out the agreement or any transaction relating to the agreement; or

•

enforce any security under the agreement.

3.146 This applies whether the law under which the agreement was made is Australian law or foreign law, including the law of a part of a foreign country. [Schedule 2, item 88, section 823V of the Act]

3.147 An action or proceeding does not lie against an officer, senior manager, employee, agent, body corporate or person engaged to provide services to the body corporate or related body corporate in relation to anything the person did in good faith if it was reasonable for the person to do the thing or to omit to do the thing for the purpose of:

•

complying with a direction ASIC or the RBA gave under Part 7.3 of the Act;

•

taking a measure or action specified in a direction from ASIC or the RBA under Part 7.3 of the Act; or

•

doing or refrain from doing anything in accordance with such a direction.

3.148 The evidential burden is on the person to prove that their actions were reasonable in order for the protection to apply (see section 13.3(2) of the Criminal Code 1995). [Schedule 2, item 88, section 823X of the Act]

3.149 The Court may make orders as it sees fit if on application of ASIC or the RBA or both, it appears to the Court that a person has contravened a provision of the operating rules of a licensed CS facility. [Schedule 2, items 89 and 90, paragraphs 1101B(1)(a) and (aa) of the Act]

Power to obtain reports

3.150 ASIC is empowered to obtain an expert report on specified matters in relation to FMI licensees. The RBA has a corresponding power in relation to CS facility licensees. This is to ensure that there is a mechanism for the regulators to obtain appropriate expert information from an independent source. ASIC's power to require an expert report follows the same process regardless of the type of FMI. With respect to market licensees and CS facility licensees, ASIC's power to obtain an expert report replaces the Ministerial power to require a market licensee or CS facility licensee to provide an audit report on a special report. [Schedule 2, items 87, 115, 116 and 117, sections 794BA, 823BB, 904L and 908BWA of the Act; Schedule 3, items 15, 82, 166 and 167, sections 794B, 823B and Schedule 3 to the Act]

Derivative trade repository licensee and benchmark administrator report

3.151 Where ASIC directs a derivative trade repository licensee or a benchmark administrator licensee to provide a special report, ASIC is not required to provide a copy of the report to the Minister. [Schedule 3, items 161 and 163, subsections 904H(1) and 908BV(3) of the Act]

Expert reports

3.152 ASIC may appoint, or direct a licensee to appoint, an expert to provide a report on specified matters relating to the licensee and relevant matters in fulfilling the licensee's obligations. The RBA may also appoint or direct a CS facility licensee to appoint an expert to provide such a report. Merits review is available with respect to a decision by ASIC or the RBA to appoint or direct a licensee to appoint an expert to provide a report. If the subject of a report is relevant to both ASIC and the RBA's regulatory mandates, both regulators could coordinate with respect to one report rather than each requesting a report. [Schedule 2, items 87, 115, 116 and 117, sections 794BA, 823BB, 823BC, 904L and 908BWA of the Act]

3.153 Where an expert is appointed, ASIC or the RBA must give the licensee notice that an expert is appointed and determine a fee equal to ASIC or the RBA's expenses in appointing and paying the expert to provide the report. The licensee is liable to pay the costs associated in producing the report which must be paid to ASIC or the RBA. Where ASIC or the RBA directs a licensee to appoint an expert to produce a report, the licensee is required to pay the expert directly.

3.154 An expert must have the necessary skills and qualifications to make a report on the specified matter and must be a person nominated or approved by ASIC or the RBA, in the case that a licensee is directed to appoint an expert.

3.155 The licensee required to provide the report must give assistance to the appointed person preparing an expert report as reasonably required. The obligation to comply includes providing all information, explanation and assistance reasonably necessary for the preparation and provision of the report.

3.156 If the appointed person requests the licensee to give them such information, explanation or assistance, ASIC may direct the licensee to comply with the request on a specified day.

3.157 An expert appointed by ASIC or the RBA is not liable in respect of an action or other proceeding for damages in relation to an act done or omitted to be done in good faith in performance of their task under these provisions. [Schedule 2, item 95, paragraph 246(1)(n) of the ASIC Act]

Contravention

3.158 Failure to take reasonable steps to comply is an offence with a penalty of 2 years imprisonment. [Schedule 2, items 87, 93, 115, 116, 117, 118, 119 and 120, subsections 794BA(5), 823BB(5), 823BC(5), 904L(5) and 908BW(5) and Schedule 3 to the Act]

3.159 Failure to comply with a direction to appoint a person to provide an expert report in relation to the licensee is an offence with a penalty of 2 years imprisonment. [Schedule 2, items 87, 93, 115, 118, 119 and 120, subsections 794BA(7), 823BB(7), 823BC(7), 904L(7) and 908BW(7) and Schedule 3 to the Act]

Additional transferred powers

Licensing of financial markets

3.160 ASIC has direct licensing powers relating to financial markets, including:

•

granting a domestic or overseas market licence; [Schedule 3, items 21 to 27, subsections 795B(1), (2) and (3) of the Act]

•

imposing, varying, and revoking licence conditions; [Schedule 3, items 31, 33 to 44, section 796A of the Act]

•

issuing, revoking or varying an exemption from all or specified provisions of Part 7.2, 7.2A and Part 7.3 of the Act; [Schedule 2, items 53 and 57, sections 791C and 820C of the Act; Schedule 3, items 64 to 66, section 798M of the Act]

•

varying a licence to change the name of the licensee; [Schedule 3, items 45 and 46, section 797A of the Act]

•

suspending or cancelling a licence; [Schedule 3, items 47 to 52, sections 797B and 797C of the Act]

•

varying, revoking or detailing the effect of a suspension; [Schedule 3, items 53 and 54, sections 797D and 797E of the Act]

•

approving an overseas market licensee's request to change a country of principal place of business; [Schedule 3, item 1, paragraph 792A(1)(g)(ii) of the Act]

•

approving a change of country of an overseas licensee; [Schedule 3, item 5, subsection 792H(1) of the Act]

•

requiring an audit report on the annual report of a market licensee; and [Schedule 3, items 3 and 4, section 792F of Act]

•

the requirement to consider the list of matters when deciding to grant, suspend or cancel an Australian market licence, impose, vary or revoke conditions on that licence, or disallow changes to market operating rules. [Schedule 3, items 57 to 62, section 798A of the Act]

Licensing of CS facilities

3.161 Given that ASIC and the RBA co-regulate CS facilities, the respective power of each regulator corresponds to their overall objectives and mandate. ASIC has licensing and enforcement powers to align with their objective to maintain, facilitate and improve the performance of the financial system. The RBA has powers aligning with the objective to maintain overall stability of the Australian financial system.

3.162 The following Ministerial powers with respect to CS facilities are transferred to ASIC:

•

granting a domestic or overseas CS facility licence; [Schedule 2, items 2 to 9, section 824B of the Act]

•

approving an overseas CS facility licensee's request to change a country of principal place; [Schedule 3, item 69, paragraph 821A(1)(f) of the Act]

•

approving a change of country by foreign licensee; [Schedule 3, item 73, section 821F(1) of the Act]

•

imposing, varying, and revoking licence conditions; [Schedule 3, items 94, 96 to 105, section 825A of the Act]

•

varying a licence to change the name of a licensee; [Schedule 3, items 106 and 107, section 826A of the Act]

•

suspending or cancelling a licence; [Schedule 3, items 108 to 113, sections 826B and 826C of the Act]

•

varying, revoking or detailing the effect of a suspension; [Schedule 3, items 114 and 115, sections 826D and 826E of the Act]

•

the requirement to consider the list of matters when deciding to grant, suspend or cancel a CS facility licence, impose, vary or revoke conditions on that licence, or disallow changes to the CS operating rules ; and [Schedule 3, items 118 to 123, section 827A of the Act]

•

requiring an audit report on the annual report of a CS facility licensee. [Schedule 3, items 71 and 72, section 821E of the Act]

3.163 ASIC may extend or shorten the duration of an exemption. Amendments are made to the criteria for when ASIC may make an exemption by extending it to persons or classes of persons. [Schedule 2, item 57, section 820C of the Act]

Compensation arrangements and security exchanges

3.164 Operational decisions in relation to the approval of compensation arrangements and changes to the Securities Exchange Guarantee Corporation, have been transferred to ASIC. This transfer of power increases certainty for market operators, the Securities Exchange Guarantee Corporation, and other stakeholders, whilst ensuring the timeliness and efficiency of the operation of compensation arrangements

3.165 Compensation arrangements are provided by the National Guarantee Fund for members of the Securities Exchange Guarantee Corporation, or through other compensation schemes approved by the Minister for market operators that are not members of the Securities Exchange Guarantee Corporation and which are required to have compensation arrangements. ASIC will be permanently transferred any Ministerial powers that were delegated under the Ministerial delegation, and the Minister will retain power over compensation regimes that were not delegated to ASIC.

3.166 ASIC has the following direct powers in relation to compensation arrangements:

•

considering whether a market is covered by Division 4 of Part 7.5 of the Act; [Schedule 3, items 134 and 135, section 881D of the Act]

•

approving compensation arrangements with or after a grant of a licence; [Schedule 3, items 136 to 139, section 882A and 882B of the Act]

•

revoking an approval of compensation arrangements; [Schedule 3, item 140, section 882C of the Act]

•

treat the application as approval of the compensation arrangements and consider whether the arrangements are adequate if an application contains details about the proposed compensation arrangements; [Schedule 3, item 133, section 881C of the Act]

•

approving proposed changes to compensation arrangements as set out by Division 3 of Part 7.5 of the Act, that are not required to be dealt with in the compensation rules; [Schedule 3, items 148 to 150, subsections 884C of the Act]

•

requiring compensation arrangements to be adequate; [Schedule 3, item 151, subsection 885B(1) and (2) of the Act]

•

determining the adequacy of compensation arrangements; and [Schedule 3, item 152 to 154, subsections 885C(3) and 885J(1) and (2) of the Act]

•

issuing, varying or revoking an exemption from all or part of Part 7.5 of the Act. [Schedule 3, items 157 to 159, section 893B of the Act]

3.167 ASIC may request a risk assessment report from the operator of a financial market. [Schedule 3, item 156, subsection 892K(1) of the Act]

Publication of licences

3.168 The former requirement to publish notifications of a licence on the Gazette is updated to ASIC's website to reflect ASIC's licensing powers in respect of financial markets and CS facilities.

3.169 The following licensing notifications must be published on ASIC's website:

•

varying or revoking an exemption of a financial market (including exemptions to compensation regimes under Part 7.5 of the Act); [Schedule 3, items 67 and 160, subsections 798M(5) and 893B(5) of the Act]

•

granting an Australian market licence; [Schedule 3, item 28, section 795C of the Act]

•

imposing, varying or revoking conditions of an Australian market license; [Schedule 3, item 32, subsection 796A(1) of the Act]

•

publishing a notice of suspension or cancellation; [Schedule 3, items 55 and 56, subsection 797F(1) of the Act]

•

varying or revoking of an exemption of a CS facility; [Schedule 3, item 68, subsection 820C(5) of the Act]

•

granting a CS facility licence; [Schedule 3, item 91, section 824C of the Act]

•

imposing, varying or revoking conditions of a CS facility licence; and [Schedule 3, item 95, subsection 825A(1) of the Act]

•

suspension or cancellation of a CS facility licence. [Schedule 3, items 116 and 117, subsection 826F(1) of the Act]

3.170 The amendments provide further clarity by updating the language to provide certainty that of what is included in the publication, which may include when the licence takes effect. [Schedule 2, items 54, 58 and 59, sections 795C and 824C, and paragraph 824C(b); Schedule 3, items 28, 85 and 91, sections 795C, 823C(6) and 824C of the Act]

Provision of multiple licences

3.171 ASIC may grant two or more licences in the same document provided that ASIC is satisfied the relevant licence conditions are met:

•

for a market licence, the conditions under subsection 795B(1) or (2) of the Act; or

•

for a CS facility, the conditions under subsections 824B(1), (1A) or (2) of the Act. [Schedule 3, items 29, 92, and 30, and 93, sections 795D and 824D and subsections 795E(3) and 824E(3) of the Act]

Consultation

3.172 As a result of the co-regulatory environment, consultation between ASIC and the RBA is necessary to ensure effective regulation of CS facilities.

3.173 ASIC must consult with the RBA prior to exercising powers relating to CS facilities including:

•

granting, revoking, suspending, or cancelling a CS facility licence;

•

imposing, varying or revoking conditions on a CS facility licence; and

•

disallowing a rule change, or exercising its exemptions or directions powers.

[Schedule 3, item 127, subsection 827E(1) of the Act]

3.174 Similarly, the RBA is required to consult or provide advice to ASIC prior to the exercise of any of their exemption or directions powers. [Schedule 3, item 127, subsection 827E(2) of the Act]

3.175 For any requirement for the regulators to consult each other prior to acting, the action will continue to be valid and have effect in the event a regulator fails to engage in consultation prior to exercising their powers. This aims to provide certainty among the affected entities as the decision will continue to have effect regardless of whether consultation has occurred. However, this provision does not exclude judicial review under section 75(v) of the Constitution and section 39B of the Judiciary Act 1903 where failure to meet procedural requirements would amount to jurisdictional error.

Providing advice to the Minister

3.176 Given the Minister's limited involvement in licensing and supervision of financial markets and CS facilities, there is no requirement for ASIC to continue to provide advice to the Minister with respect to:

•

lodgement of an application for an Australian market licence; [Schedule 3, items 19 and 20, subsections 795A(1) and (2) of the Act]

•

lodgement of an application for a CS facility licence; [Schedule 3, items 89 and 90, subsection 824A(1) and 824A(2) of the Act]

•

a market licensee advising it has breached a general licence obligation or is unable to meet its obligations; and [Schedule 3, item 2, subsection 792B(1) of the Act]

•

a CS facility licensee advising ASIC it has breached a general licence obligation or is unable to meet its obligations. [Schedule 3, item 70, section 821B(1) of the Act]

3.177 ASIC's ability to provide advice, information or documents to the Minister on any matter the Minister retains power over is unchanged. ASIC may continue to provide advice to the Minister on Australian market licences and CS facilities. [Schedule 3, items 63 and 124, sections 798B and 827B of the Act]

3.178 The RBA may continue to provide advice to the Minister in relation to any matter concerning CS facilities. [Schedule 3, item 124, section 827C of the Act]

Licensee compliance

3.179 ASIC may assess a licensee's compliance with their obligations under Chapter 7 of the Act. ASIC does not need to provide a copy of the assessment to the Minister for an:

•

Australian market licensee; [Schedule 3, items 16, 17 and 18, subsections 794C(3) and (6) of the Act]

•

CS facility licensee (ASIC will still need to provide a copy of the assessment to the RBA); [Schedule 3, items 83 and 84, subsections 823C(3) and (6) of the Act]

•

derivative trade repository licensee; or [Schedule 3, item 162, subsection 904J(2) of the Act]

•

benchmark administrator licensee; [Schedule 3, item 164, subsection 908BW(2) of the Act]

3.180 The RBA has similar powers to assess a CS facility licensee's compliance with the financial stability standards. The RBA is not required to provide a copy of their assessment to the Minister, however, must provide a copy of the assessment to ASIC. [Schedule 3, items 86, 87 and 88, subsections 823CA(2) and (5) of the Act]

Disqualification

3.181 The procedure for ASIC to declare that an individual is disqualified from being involved in an Australian market licensee, CS facility licensee, derivative trade repository licensee or a benchmark administrator licensee no longer involves the Minister. Therefore, amendments are made to remove the Minister's involvement where ASIC is not required to provide the following to the Minister:

•

a declaration notice; [Schedule 3, items 128 to 130, subsection 853D(3) and paragraph 853D(6)(b) of the Act]

•

a revocation of a declaration; and [Schedule 3, item 131, subsection 853E(2) of the Act]

•

a notification of a disqualified individual being involved in a licensee. [Schedule 3, item 132, section 853G of the Act]

Operating rules disallowance

3.182 ASIC is directly empowered to disallow changes to operating rules for:

•

financial markets; [Schedule 3, items 6 to 9, subsections 793E(2), (3) and (4) of the Act]

•

CS facilities, provided that ASIC consults with the RBA; [Schedule 3, items 74 to 76, subsections 822E(2), (3) and (4) of the Act]

•

compensation rules; and [Schedule 3, item 145 to 147, subsections 884B(5) to (7) of the Act]

•

Securities Exchanges Guarantee Corporation rules. [Schedule 3, item 155, subsections 890H(1) and (2) of the Act]

3.183 All other aspects of disallowing operating rules remain the same including the timeframe, notification and affected entities.

Consequential and minor amendments

3.184 The Minister's general power of delegation to ASIC under Chapter 7 of the Act is amended to exclude powers in Parts 7.2, 7.2A, 7.3, 7.3A, 7.3B, 7.4, 7.5 and 7.5A of the Act. [Schedule 3, item 165, subsection 1101J(1) of the Act]

3.185 As a result of updating the directions power to be given to a market licensee, a consequential amendment is made to ensure that Division 3 financial products are deemed to be tradable for the purposes of the prohibition against insider trading. [Schedule 2, items 73 and 74, section 1042E of the Act]

3.186 If a cash dealer communicates information to the AUSTRAC CEO about their suspicion in relation to a transaction to which the cash dealer is a part, neither of the following Acts prohibit the cash dealer from disclosing this information to an operator of a financial market exempted under section 791C of the Act from holding an Australian financial market licence:

•

Financial Transaction Reports Act 1988; and

•

Anti-Money Laundering and Counter-Terrorism Financing Act 2006 [Schedule 5, item 1, paragraphs 243D(d) and 243E(d) of the ASIC Act]

3.187 Appointed or directed experts under proposed section 823BB of the Act are protected from proceedings provided that the expert acted in good faith when fulfilling their function or power and complied with any other corporations legislation, or prescribed law of the Commonwealth, a State or a Territory. [Schedule 3, item 101, paragraph 246(1)(n) of the ASIC Act]

3.188 As a result of updates to the declared financial market, corresponding amendments have been made to the Bankruptcy Act 1966 and the PPSA. [Schedule 2, items 28 and 29, subsection 5(1) Bankruptcy Act 1966 and section 49 of the PPSA]

3.189 The amendments also make minor amendments to:

•

fix an error in the notes in sections 791B and 820B of the Act by replacing the term subsection with section; and

•

for an order for compensation arising from an offence in context of an administrator being appointed to a company, replace an outdated reference to section 5 of the Crimes Act 1914 (which no longer exists) with a reference to section 11.2 of the Criminal Code.

•

omit empty brackets in paragraphs 792A(1)(h) and 821A(1)(g) of the Act. [Schedule 5, items 2, 3, 4, 5 and 6, notes to sections 791B and 820B, paragraphs 437E(1)(a), 792A(1)(h) and 821A(1)(g)]

3.190 The amendments replace out of date references to the Financial Management and Accountability Act 1997 with references to the Public Governance, Performance and Accountability Act 2013 in the Act. [Schedule 5, item 7, subsections 883D(6), 889J(7) and 889K(6) of the Act ]

3.191 The amendments replace an out of date reference to Australian Stock exchange Limited with Australian Securities Exchange Limited in the Act and the Insurance Act 1973. [Schedule 5, items 8 and 9, paragraph 890A(3)(a) of the Act and subsection 3(1) of the Insurance Act 1973]

3.192 In line with the transfer of powers from the Minister to ASIC for imposing, varying and revoking licence conditions, the requirement for ASIC to give the Minister any application and documents lodged with ASIC has been repealed from section 825A of the Act as it is redundant. [Schedule 2, item 60]

Commencement, application, and transitional provisions

3.193 The amendments in Parts 1 to 10 and 12 to 13 of Schedule 2 commence on the seventh day after Royal Assent.

3.194 The amendments in Part 11 of Schedule 2 commence on the day after the end of the period of 6 months beginning on the day after Royal Assent.

3.195 The amendments in Part 14 of Schedule 2 commence on the later of:

•

immediately after the commencement of the amendments in Parts 1 to 10; and

•

the commencement of item 11 of Schedule 1 to the Treasury Laws Amendment (Reserve Bank Reforms) Act 2024.

3.196 The latter amendments do not commence at all if item 11 of Schedule 1 to the Treasury Laws Amendment (Reserve Bank Reforms) Act 2024 does not commence.

3.197 The amendments in Schedule 3 commence on the seventh day after Royal Assent.

3.198 The amendments in Schedule 5 commence on the day after Royal Assent.

Application and transitional provisions relating to Australian CS facility licences

3.199 Definitions for the new expressions amending schedule and commencement time for specific use in relation to the transitional provisions for the amendments made in Schedule 2 to the Bill has been added to Chapter 10 of the Act. [Schedule 2, item 142, section 1705 of the Act]

3.200 The amendments made in Part 1 of Schedule 2 to the Bill create a general licence condition for CS facility licences that if the licence was granted under subsection 824B(1) of the Act, the licensee must be a body corporate registered under Chapter 2A of the Act. Those amendments apply in relation to applications for a licence made after those amendments commence. [Schedule 2, item 142, section 1705A of the Act]

3.201 Transitional provisions provide that an application for an Australian CS facility licence, made under section 824A of the Act before the commencement of Schedule 2 to the Bill, continues to be valid notwithstanding whether the body corporate is registered under either a Chapter 2A or Division 2 of Part 5B.2 body corporate. If the licence had been granted by the Minister prior to commencement or even on or after commencement for applications already made, the licence is to be dealt with as if the licence was granted by ASIC.

3.202 Transitional provisions also apply for Australian CS facility licences in force before commencement for operating overseas CS facilities. If an application was undecided before commencement, if the Minister decides the application by granting a licence under the old Act, the licence is taken to be granted under the old Act to a body corporate as if the licence had been granted under the amended Act. If the licence granted under the old Act to a body corporate as inserted by Schedule 2 to the Bill, the licence is taken to have been granted to the body corporate as inserted by Schedule 2 to the Bill. [Schedule 2, item 142, sections 1705B, 1705C and 1705D of the Act]

3.203 The amendments do not apply in relation to a notice given by the Minister requiring a market licensee or a CS facility licensee to give ASIC a special report, if that notice was in force immediately before commencement. [Schedule 2, item 142, section 1705D of the Act]

Application provisions relating to dealing with licences that are not being used

3.204 The amendments relating to dealing with licences that are not being used apply to decisions to suspend or cancel a licence on or after the commencement of Schedule 2 to the Bill (whether an act, omission or change happens, or period of lack of use starts before, on or after that commencement). [Schedule 2, items 142, section 1705E of the Act]

Transitional provisions relating to prescribed financial markets and widely held market bodies

3.205 Financial markets prescribed by regulations are taken to be (and may be dealt with as if they were) declared financial markets. Widely held market bodies prescribed by regulations continue to be widely held market bodies after the commencement of the amendments.

3.206 However, once ASIC makes its first declaration the above-mentioned transitional provision will cease to have effect. ASIC can make an instrument declaring all currently prescribed financial markets to be declared financial markets in its first declaration instrument on the basis that they are already a declared financial market under the transitional arrangements. The transitional provision is structured in this way to achieve transparency on the face of the law so readers can easily identify declared financial markets in one place. [Schedule 2, items 142, sections 1705F and 1705H of the Act]

3.207 Schedule 2 contains a translation of references provision to update references to prescribed financial market(s) in instruments made under the Act to declared financial market(s). [Schedule 2, items 142, section 1705G of the Act]

Application and transitional provisions relating to preservation of voting power

3.208 The amendments relating to preservation of voting power apply to a person who holds a particular percentage of voting power in a widely held market body, that is declared by ASIC (not by virtue of the transitional provision in section 1706H of the Act), at a particular time on or after the commencement of Schedule 2 to the Bill. [Schedule 2, items 142, section 1705J of the Act]

3.209 An approval to hold a particular percentage of voting power in a widely held market body that was taken to be granted by the Minister because of the operation of the preservation of voting power provisions as in force immediately before the commencement of Schedule 2 to the Bill is, on or after commencement, taken to be approval granted because of the operation of the preservation of voting power provisions as amended by Schedule 2 to the Bill. [Schedule 2, items 142, section 1705K of the Act]

Transitional provisions relating to approval for control of certain Australian licensees

3.210 If, at the commencement of Part 5 of Schedule 2, a person holds more than 20 per cent voting power in a controlled Australian financial body, the person is taken to be granted an approval by ASIC to hold that percentage of voting power at that commencement. The approval comes into force at that commencement and remains in force indefinitely unless varied or revoked. ASIC is taken to have complied with its obligations under Part 7.4 of the Act for granting the approval. [Schedule 2, item 142, section 1705L of the Act]

3.211 The obligation to notify ASIC of certain matters in sections 792B and 821B of the Act are updated so that a market or CS facility licensee that becomes aware that a person has come to have, or has ceased to have, a voting power that exceeds voting power of 20 per cent in the licensee, or holding company of the licensee, must notify ASIC.

3.212 Those amendment apply in relation to changes in voting power that occur at or after commencement time. [Schedule 2, item 142, section 1705M of the Act]

Transitional provisions relating to exemptions

3.213 The exemptions power is broadened to provide certainty that an exemption could be provided to particular operators. ASIC may exempt a financial market or class of financial markets, a CS facility or class or CS facilities, or a person or class of persons from all or specified provisions of Parts 7.2 and 7.3 of the Act, respectively.

3.214 Exemptions that are given under subsections 791C(1) and 820C(1) of the Act and which are in force immediately before commencement continue to be in force and may be dealt with as if the exemption was given under subsections 791C(1) or 820C(1) of the Act as amended by Schedule 2. [Schedule 2, item 142, sections 1705N and 1705P of the Act]

Transitional provisions relating to rules

3.215 Paragraphs 793N(2)(aa) and 822B(2)(aa) of the Act provide that if there is an inconsistency between the operating rules of a licensed market or a licensed CS facility and the CS facility rules, the CS facility rules prevail to the extent of any inconsistency.

3.216 That rule applies in relation to operating rules that are in force at commencement time, whether made before, at or after commencement time. [Schedule 2, item 142, subsection 1705Q(1) of the Act]

3.217 Subsection 827D(2A) of the Act provides that if there is an inconsistency between the CS facility rules, CS services rules, derivative transaction rules and the derivative trade repository rules, and the financial stability standards, the financial stability standards prevail to the extent of any inconsistency.

3.218 That rule applies in relation to financial stability standards that are in force at commencement time, whether made before at or after commencement time. [Schedule 2, item 142, section 1705Q(2) of the Act]

Transitional provisions relating to directions

3.219 The amendments to subsections 794D(2), 798J(2), 823D(2) and 904G(2) of the Act do not apply in relation to a direction given under those subsections before commencement time. [Schedule 2, item 142, section 1705R of the Act]

3.220 The amendment to subparagraph 1101B(1)(a)(iii) of the Act does not apply in relation to an application made by ASIC under subsection 1101B(1) of the Act or an order made by the Court before commencement time. [Schedule 2, item 142, subsection 1706S(2) of the Act]

Transitional provisions relating to the transfer of ministerial power

3.221 The amendments insert a definition for amending part for the purposes of the transitional provisions for the amendments in Schedule 3. [Schedule 3, item 168, section 1706 of the Act]

3.222 An instrument or notice (under sections 794B or 823B of the Act) that is made by the Minister under a provision of the Act that has been amended by Schedule 3 to the Bill and is in force immediately before the commencement of the amendments and has effect as if it were made pursuant to the Act as amended. [Schedule 3, item 168, sections 1706A and 1706B of the Act]

3.223 If a report and recommendation to suspend or cancel a market or CS facility licence was given to the Minster under paragraphs 797C(3)(b) or 826C(3)(b) of the Act before the commencement of the amendments, and the Minister did not take action in response to that report and recommendation, the Minister must give the report and recommendation to ASIC. ASIC may deal with the report and recommendation in the same way as outlined in the amended Act. [Schedule 3, item 168, sections 1706C and 1706D of the Act]

Chapter 4: Climate-related financial disclosure

Outline of chapter

4.1 Schedule 4 to the Bill generally requires entities that lodge financial reports under Chapter 2M of the Corporations Act and meet certain minimum size thresholds, or have emissions reporting obligations under the NGER scheme, to make disclosures relating to climate in accordance with relevant sustainability standards made by the AASB. The amendments phase-in the new obligations for climate-related financial disclosures over a period of 4 years.

4.2 Climate-related financial disclosures will be subject to similar assurance requirements to those currently in the Corporations Act for financial reports and will require entities to obtain assurance from an auditor. The extent and level of assurance required will be set out in Australian assurance standards for climate disclosures, developed by the AUASB.

4.3 These amendments ensure that relevant entities disclose information about their exposure to material climate-related financial risks and opportunities, including their climate-related plans, greenhouse gas emissions and governance processes, in accordance with the relevant sustainability standards made by the AASB. The new requirements build on the existing annual financial reporting framework through inclusion of a new 'sustainability report' that is required to be prepared by certain entities.

4.4 Businesses, investors, regulators and the public will have a clear and common understanding of obligations for entities to disclose climate-related financial risks and opportunities, in line with international standards.

4.5 All legislative references in this Chapter are to the Corporations Act unless otherwise specified.

Context of amendments

4.6 Climate change is recognised internationally as presenting material risks to the global financial system – risks which need to be managed by capital markets, regulators and corporations. These include the physical risks of climate change and the transition risks associated with the market, regulatory and technological changes brought on by efforts to mitigate climate change.

4.7 Efforts to mitigate and adapt to climate change also present opportunities for entities: for example opportunities to gain cost advantages over competitors through improved energy efficiency; to innovate and develop new products and services that improve comparative advantage; or to gain access to new markets as a result of low-emissions credentials. Improved disclosure will help investors understand and finance these opportunities.

4.8 Improving climate-related financial disclosures will support regulators to assess and manage systemic risks to the financial system as a result of climate change and efforts taken to mitigate its effects. In-scope entities will be required to disclose information about their climate-related financial risks and opportunities in line with AASB sustainability standards in the annual report.

4.9 The ISSB has developed a global baseline for sustainability and climate-related financial disclosure reporting standards, which aims to improve consistency and comparability across entities reporting. The ISSB issued draft standards for consultation in 2022 and released the final standards (IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information and IFRS S2 Climate-related Disclosures) in June 2023.

4.10 It is important that Australia's financial and sustainability-related reporting frameworks are internationally aligned to support Australian entities that operate across jurisdictions: minimising compliance costs for companies and maximising comparability for users. International alignment with the ISSB standards will also support Australia's reputation as an attractive destination for international capital and help draw the investment required for the transition to net zero. For example, because investors have clear visibility of the steps entities are taking to reduce their exposure to climate-related risks and embrace relevant opportunities.

4.11 The proposed AASB sustainability standards are intended to align with the ISSB standards as much as possible, with modifications where necessary or appropriate to apply these standards in the Australian context. For example, incorporating Australia's national greenhouse gas emissions estimation methodologies and international climate change commitments.

4.12 The Government is taking a 'climate first, but not only' approach to mandatory disclosure requirements and these amendments will establish an enduring framework for future sustainability-related financial disclosures.

Summary of new law

4.13 The amendments set out new climate-related financial reporting requirements for entities, leveraging the existing financial reporting regime under Chapter 2M of the Corporations Act. Chapter 2M provides for record-keeping, financial reports and audit requirements.

4.14 The amendments include a new 'sustainability report' for a financial year that entities will need to prepare, in addition to their financial reports.

4.15 The sustainability report for a financial year consists of:

•

the climate statement for the year;

•

notes to the climate statement;

•

any statements prescribed by the regulations for the year;

•

notes to those prescribed statements (if any); and

•

the directors' declaration about the compliance of the statements and notes with the relevant sustainability standards.

4.16 The climate statements must be prepared in line with the relevant sustainability standards issued by the AASB.

4.17 A phased-in approach is used for the obligation to prepare a sustainability report, starting with a relatively limited group of very large entities that expands to apply to progressively to other large entities.

4.18 The size thresholds that determine the year in which entities are required to commence climate reporting are based on existing concepts in the Corporations Act and Regulations. That is, consolidated gross assets, consolidated revenue and employee thresholds which apply to the company or entity and any entities it controls at the end of the financial year.

4.19 In addition, NGER entities that are required to prepare and lodge financial reports under Chapter 2M of the Corporations Act are required to make climate-related financial disclosures. Those NGER entities that meet this criterion and that are above the publication threshold will commence reporting in Group 1, and the balance will commence reporting in Group 2.

4.20 Small and medium entities, below the relevant size thresholds (unless they are NGER controlling corporations) are not required to make climate related financial disclosures. Neither are entities that are exempt from lodging financial reports under Chapter 2M.

4.21 A modified liability approach will apply for a transitional period to ensure that reporting entities, auditors and directors are allowed time to develop experience and practice to report in line with the required standards. After this period, the existing liability arrangements will apply.

Detailed explanation of new law

Part 1 – Climate-related financial disclosures

New sustainability reporting requirements

4.22 These amendments incorporate climate-related financial disclosures as part of a new annual sustainability report, added to the existing obligations to prepare annual financial reports under Chapter 2M of the Corporations Act. This will ensure that climate-related financial disclosures are reported in the same context as the financial statements and directors report for the financial year.

4.23 In general, the amendments aim to replicate existing reporting obligations for annual financial reporting, including who must prepare annual financial reports, recordkeeping, presentation of reports at AGMs, provision of financial reports to members and the public, role of the regulator, legal liability and audit and assurance.

4.24 Some modifications have been made to requirements for the annual sustainability report compared to annual financial reporting obligations. These modifications are made where the Government considers there is little benefit to applying the requirements equally to the sustainability report (for example reducing the scope of entities who must prepare sustainability reports because the report may be of limited use to investors) or where it is necessary to encourage more fulsome disclosures while the regime is in its infancy (for example transitional modified liability settings and audit and assurance requirements).

New definitions

4.25 To support the amendments, the following definitions are included in section 9 of the Corporations Act:

•

'climate statements' refers to annual climate statements under section 296A and 296B;

•

greenhouse gas emissions (Scope 1, Scope 2, Scope 3 and financed emissions) are defined by sustainability standards made by the AASB. Broadly:

o

Scope 1 greenhouse gas emissions are direct greenhouse gas emissions that occur from sources that are owned or controlled by an entity.

o

Scope 2 greenhouse gas emissions are indirect greenhouse gas emissions from the generation of purchased or acquired electricity, steam, heating or cooling consumed by an entity. Purchased and acquired electricity is electricity that is purchased or otherwise brought into an entity's boundary. Scope 2 greenhouse gas emissions physically occur at the facility where electricity is generated.

o

Scope 3 greenhouse gas emissions are indirect greenhouse gas emissions (not included in Scope 2 greenhouse gas emissions) that occur in the value chain of an entity, including both upstream and downstream emissions, including financed emissions. Scope 3 greenhouse gas emissions include the Scope 3 categories in the Greenhouse Gas Protocol Corporate Value Chain (Scope 3) Accounting and Reporting Standard (2011).

o

Financed emissions are the portion of greenhouse gas emissions of an investee or counterparty attributed to the loans and investments made by an entity to the investee or counterparty. These emissions are part of Scope 3 Category 15 (investments) as defined in the Greenhouse Gas Protocol Corporate Value Chain (Scope 3) Accounting and Reporting Standard (2011).

•

'substantive provision' of a sustainability report means anything required to be included in such a report except for the directors' declaration about the statements and the notes;

•

'sustainability records' means records that contain and explain the methods, assumptions and evidence from which the substantive provisions of sustainability reports are made up; and

•

'sustainability report' refers to an annual sustainability report prepared under Chapter 2M (see section 296A regarding contents of this report).

[Schedule 4, item 3, section 9]

Overview of obligations to prepare sustainability reports

4.26 The amendments update the overview provisions setting out the obligations under Chapter 2M (the financial reporting regime) to reflect the new obligation to prepare a sustainability report and other related obligations. Companies, registered schemes, registrable superannuation entities and disclosing entities that prepare annual financial reports under Chapter 2M must also prepare annual sustainability reports, and keep records, if they meet certain size thresholds.

4.27 The overview of reporting obligations is updated to include the requirement to prepare a sustainability report and references sections 296A 296B which contain details of the contents of sustainability reports. The contents of the sustainability report include the climate statement, any notes to the climate statement, any additional statements or notes that are determined by the Minister, and the directors' declaration about the statements and notes.

[Schedule 4, items 6 to 13, heading to Chapter 2M, subsections 285(1), heading to table under subsection 285(1), table items 1A, 4, 5, and 6 of the table under subsection 285(1), section 285A]

4.28 The amendments also update the table summarising reporting obligations for companies limited by guarantee. The amendment under the item concerns companies limited by guarantee with annual revenue, or if part of a consolidated entity, annual consolidated revenue, of $1 million or more and which meet the sustainability reporting thresholds. The item stipulates that such a company must prepare a financial report and sustainability report, which must be audited. They must also provide a directors' report, which can be less detailed than typically required of other companies. All three reports must be provided to members who choose to receive them. References to the relevant sections are included.

[Schedule 4, item 14, table item 4 of the table under section 285A]

4.29 The amendments intend to improve the quality and comparability of disclosures of material climate-related financial risks and opportunities within the financial reporting framework. This will ensure investors are provided with greater transparency of an entity's climate-related plans and strategies. Improved climate-related financial disclosures will also support regulators to assess and manage systemic climate-related risks to the financial system.

Sustainability reports at AGMs

4.30 The amendments ensure that sustainability reports are considered as part of an AGM. Therefore, the note to subsection 250N(3) which explains the requirement for an AGM to be held in addition to other meetings is updated to reflect the introduction of the sustainability report. Similarly, the business of an AGM may include the consideration of a sustainability report as well as the annual financial report in light of the amendments.

[Schedule 4, items 4 and 5, note 1 to subsection 250N(3) and paragraph 250R(1)(a)]

Sustainability records

4.31 An entity required to prepare a sustainability report is also required to keep records that correctly explain and record its preparation of the substantive provisions of the report for 7 years. These sustainability records include documents and working papers that explain the methods, assumptions and evidence from which the substantive provisions are prepared. A failure to maintain records for 7 years is an offence of both fault-based and strict liability, mirroring the offences relating to the obligation to keep financial records. Breach of the fault-based offence has a maximum penalty of two years imprisonment, while breach of the strict liability offence has a maximum penalty of 60 penalty units.

[Schedule 4, items 15 and 16, heading to Part 2M.2 and section 286A)]

4.32 Provisions relating to language requirements and the physical format of financial records are updated to include a reference to the sustainability records. The provisions distinguish financial records and sustainability records to emphasise these are two different documents.

[Schedule 4, item 17, subsections 287(1), 287(2) and 288(1)]

4.33 A new section is inserted setting out that an entity may decide where to keep the sustainability records. This section mirrors existing section 289 for financial records. Where records are kept outside Australia, sufficient written information to support the substantive provisions of the sustainability report must be kept within Australia.

[Schedule 4, items 18 and 19, heading to section 289 and section 289A]

4.34 An entity may decide where to keep its sustainability records in accordance with the Corporations Act. If an entity keeps its records outside Australia, the entity must keep sufficient information in Australia that enables the substantive provisions of the sustainability report to be prepared. If the entity begins to keep records in Australia, the entity must give ASIC written notice, in the prescribed for m, of the place in Australia where the information to support the preparation of the substantive provisions of the report is kept. Notification is only required for the year in which the entity begins to keep information at the place for the first time. Further notification is not required in each year as more information is kept there: it is only required if the same or new information is kept in another place for the first time. The notification must be made no later than:

•

if the entity is required to lodge a sustainability report, the date when the lodgement of the report is required for the financial year in which the entity begins to keep information at that place; or

•

if the entity is not required to lodge a sustainability report, the date where lodgement of the report would be required if the entity were required to prepare a sustainability report for that year.

[Schedule 4, item 19, subsections 289A(1), (2), (3) and (4)]

4.35 ASIC may direct the entity to produce specified sustainability records kept outside Australia. The direction must be in writing, specify a place in the jurisdiction where the records must be produced, and specify a day by which the records are to be produced. The place in which the records are to be kept must be reasonable and ASIC must provide a buffer of 14 days following the direction by which the records are to be produced. The entity must comply with the direction.

[Schedule 4, item 19, subsection 289A(5), (6) and (7)]

4.36 A director's right to access financial records at all reasonable times is updated to extend to sustainability records.

[Schedule 4, items 20 and 21, subsections 290(1) and (2)]

4.37 Failure to comply with the requirements to keep records within the jurisdiction, notify ASIC of the location of records, or provide directors with a right of access is an offence of strict liability.

[Schedule 4, item 19, subsection 289A(8)]

4.38 Strict liability reduces noncompliance, which enhances the integrity of the regulatory regime enforced by ASIC. Strict liability is appropriate where there is a need to ensure offences are dealt with expeditiously to maintain public confidence in the regulatory regime. As these obligations align with the general record keeping obligations applicable to a reporting entity for financial records in annual financial reporting, the offence provisions are also aligned.

4.39 The strict liability provisions in this Schedule meet all the conditions listed in the Attorney-General's Department's A Guide to Framing Commonwealth Offences, Infringement Notices and Enforcement Powers. For example, the fines for the offences do not exceed 60 penalty units for persons other than a body corporate or 300 penalty units for a body corporate.

[Schedule 4, item 75, Schedule 3]

4.40 The application of strict liability, as opposed to absolute liability, preserves the defence of honest and reasonable mistake of fact.

4.41 The amendments also update the signposting provisions to include a reference to sections 28 to 39C of the ASIC Act which also relate to ASIC's powers to inspect records and give related information to other entities.

[Schedule 4, item 22, table item 4 of the table under section 291]

4.42 In support of these amendments, consequential amendments are made to the ASIC Act and the Corporations Act to extend the meaning of 'books' to cover sustainability reports and records.

[Schedule 4, items 1 and 2, section 5 of the ASIC Act and section 9]

Who must prepare sustainability reports

4.43 In general, the existing thresholds that determine who must prepare annual financial reports are used to determine who must prepare sustainability reports. All entities that are exempt from preparing annual financial reports are similarly exempt from preparing sustainability reports.

4.44 An entity that is an asset owner that meets the corporate size thresholds in subsection 292A(3) must prepare a sustainability report, even if it does not meet the requirements of subsection 292A(5) (regarding NGERs registered corporations) or 292A(6) (regarding asset thresholds).

4.45 The requirement to prepare a sustainability report is progressively phased-in for different cohorts, generally based on the size of the entity. An explanation of this phased-in approach is in Part 4 of this Chapter of the explanatory memorandum, regarding application provisions.

4.46 Generally, an entity must prepare a sustainability report for a financial year if that entity prepares an annual financial report for that financial year under Chapter 2M, and if it meets any one of the following for that financial year:

•

if the entity meets at least two of the following three criteria (unless another threshold is provided for in the regulations):

o

the consolidated revenue of the entity (and the entities it controls) is equal to or greater than $50 million;

o

the value of the consolidated gross assets at the end of the financial year of the entity (and the entities it controls) is equal to or greater than $25 million;

o

the entity (and the entities it controls) have at the end of the financial year, 100 or more employees;

•

if the entity is a registered corporation under the NGER Act or required to make an application to be registered under subsection 12(1) of the NGER Act; or

•

if the entity is a registered scheme, registrable superannuation entity or retail CCIV where the value of assets at the end of the financial year (including the entities it controls) is equal to or greater than $5 billion (or the amount determined by regulations).

4.47 In addition, smaller entities and asset owners are not required to prepare sustainability reports unless they are significant greenhouse gas emitters or consume large amounts of energy (indicators of relatively high exposure to climate risk). That is, entities and asset owners below the corporate size thresholds are not required to prepare reports unless they are NGER reporters.

[Schedule 4, item 25, subsections 292A(1), (3), (5), (6), and (7)]

4.48 To avoid doubt, where an entity is not covered by the above criteria (e.g. not generally required to report under Chapter 2M, or does not meet the above tests), they are not required to prepare a sustainability report for a financial year.

[Schedule 4, item 25, subsection 292A(1)]

4.49 Specifically:

•

entities that for a financial year, are already exempt from lodging financial reports under Chapter 2M of the Corporations Act, are exempt from preparing annual sustainability reports for that financial year. This includes where:

o

an entity has been provided with relief or is exempt from financial reporting by way of an ASIC class order or individual entity relief and

o

an entity is registered with the Australian Charities and Not-for-profits Commission.

•

small and medium size businesses, below the relevant size thresholds are exempt.

4.50 Part 4 of this Chapter explains the application of the law with respect to the phased-in approach for financial reporting years commencing between 1 January 2025 and 30 June 2027 (inclusive).

ASIC relief powers

4.51 ASIC has existing powers under sections 340 to 342 to relieve entities (or a specified class of entities) from complying with all or specified requirements of Parts 2M.2, 2M.3 and 2M.4 (other than Division 4) of the Corporations Act. These powers extend to the new sustainability reporting requirements including, but not limited to, the requirement to prepare a sustainability report (section 292A), the requirement to lodge reports within a certain timeframe (section 315), and the requirement to include certain information in a report (section 296A).

4.52 An entity wishing to seek relief from one or more of the new sustainability reporting requirements may apply to ASIC. ASIC's relief powers are confined by the jurisdictional threshold set out in subsection 342(1). In accordance with that threshold, ASIC may only grant relief if it is satisfied that complying with the relevant reporting requirements would make the financial report or other reports misleading, be inappropriate in the circumstances, or impose unreasonable burdens. A decision to grant relief by ASIC is discretionary and will take into account all of the relevant circumstances of an application. An application for relief must be made in writing and authorised by a resolution of the directors.

4.53 ASIC has issued regulatory guidance clearly setting out how it uses these powers in the context of financial reporting obligations, and it is expected that ASIC will over time develop similar guidance for the new sustainability reporting obligations.

Consolidated sustainability reporting

4.54 Whether an entity may choose to prepare a sustainability report on a consolidated basis is generally dependent on whether the entity prepares a financial statement on a consolidated basis.

4.55 If the entity is required to prepare financial statements on a consolidated basis, it may choose to prepare a sustainability report for the group on a consolidated basis (as the parent entity). This provision is intended to streamline general reporting requirements and treat the two reporting requirements (sustainability and financial) in a consistent manner. Where this occurs, each individual entity that is otherwise required to prepare a sustainability report would not need to, if the parent's sustainability report covers those individual entities in the consolidated sustainability report.

[Schedule 4, item 25, subsection 292A(2)]

4.56 Determining if one entity controls another must be in accordance with the accounting standards for financial statements in relation to consolidated entities. This reduces unnecessary duplication and inefficiency in reporting and reflects the fact that other entities within the same corporate group may be better placed to consolidate information.

4.57 Where an entity does not prepare consolidated sustainability reporting, but considers there are appropriate grounds to prepare a consolidated sustainability report on behalf of related entities, an entity may apply to ASIC to do so, as discussed above.

4.58 Specific provisions about consolidated financial statements are updated to incorporate climate statements. Directors and officers of controlled entities must give the controlled entity all information requested that is necessary to prepare the consolidated financial statements or to prepare consolidated sustainability reports.

4.59 Controlled entities must allow the auditor for the controlling company, scheme or entity access to its books and give the auditor any information, explanation or assistance necessary if it must prepare an annual report including consolidated financial statements or sustainability reports.

4.60 The requirement of directors and officers of controlled entities to give information, the auditor's power to obtain information from the controlled entity and the controlled entity's obligation to assist the auditor applies to the preparation of sustainability reports if the entity's reports are being prepared, reviewed or audited.

[Schedule 4, items 47 to 52, heading to Division 6 of Part 2M.3, subsections 323(1) and 323B(1) and section 323C]

Large entities

4.61 Large entities that are required to prepare and lodge annual financial reports under Chapter 2M of the Corporations Act will be required to disclose information about climate-related risks and opportunities. Large entities are defined using size thresholds equivalent to the existing large proprietary company definition (this threshold applies to both listed and unlisted companies).

[Schedule 4, item 25, subsection 292A(3)]

4.62 The amendments provide flexibility for the regulations to determine different applicable thresholds that consider whether an entity is significant enough to warrant reporting (such as to the entity's consolidated revenue amount or to the number of employees they have). This flexibility mirrors the general operation of section 45A regarding large proprietary companies which also delegates such a power regarding entity size thresholds to the regulations. This delegation is necessary to ensure that the law does not become out of date and can be flexibly updated, depending on the trends and changing sizes of entities. The delegation allows the legislation to keep pace with economic growth over time when thresholds in the primary law are no longer appropriate. It is appropriate that the delegation is made to the Governor-General who makes the regulations rather than a Minister or the regulator like ASIC.

[Schedule 4, item 25, subsection 292A(3)]

4.63 When counting employees, part-time employees should be taken into account as an appropriate fraction of a full-time equivalent.

[Schedule 4, item 25, subsection 292A(4)]

4.64 To determine whether an entity controls another entity in relation to sustainability reports, reference is made to the accounting standards made for financial statements, even if these standards do not otherwise apply to the entity.

[Schedule 4, item 25, paragraph 292A(7)(a)]

4.65 Calculating consolidated revenue and the value of consolidated gross assets for the purpose of determining if an entity must provide an annual sustainability report must be done in accordance with the accounting standard in force at the relevant time. This applies even if the standard does not otherwise apply to the financial year or to some or all of the entities concerned.

[Schedule 4, item 25, paragraph 292A(7)(b)]

Large emitters

4.66 Where entities are subject to both the annual financial reporting requirements under the Corporations Act and emissions reporting obligations under the NGER Act, they will be required to disclose climate-related financial risks and opportunities in accordance with the standards regardless of size.

[Schedule 4, item 25, subsection 292A(5)]

4.67 Reporting by NGER-covered entities is appropriate, given these are Australia's largest emitters of Scope 1 and Scope 2 greenhouse gas and therefore likely face high climate-related transition risk. Such risks include policy, legal, technological, market and reputational risks. These risks could carry financial implications for an entity, such as increased operating costs or asset impairment due to new or amended climate-related regulations. The entity's financial performance could also be affected by shifting consumer demands and the development and deployment of new technology.

Asset owners

4.68 Asset owners (registrable superannuation entities, registered schemes and retail CCIVs) are considered large if total assets under management are more than $5 billion. For retail CCIVs, the threshold applies to the whole CCIV (that is, the sum of all assets under management in all sub-funds). This threshold is designed to capture large asset owners that do not otherwise have employees or traditional sources of revenue. This will support consistent reporting of climate-related risks and opportunities across the financial sector, noting the significance of these entities in Australia's financial system. The threshold serves as a net to ensure all relevant entities are caught. Timing for reporting by asset owners is explained at [Schedule 4, item 145, section 1707B].

[Schedule 4, item 25, subsection 292A(6)]

4.69 Similarly, the amendments provide flexibility for the regulations to determine different applicable thresholds that consider whether an asset owner is significant enough to warrant reporting (specifically, to the asset value threshold). This flexibility mirrors the general operation of section 45A regarding large proprietary companies which also delegates such a power regarding entity size thresholds to the regulations. This delegation is necessary to ensure that the law does not become out of date and can be flexibly updated. The delegation allows the legislation to keep pace with economic growth over time when thresholds in the primary law are no longer appropriate. It is appropriate that the delegation is made to the Governor-General who makes the regulations rather than a Minister or the regulator like ASIC.

[Schedule 4, item 25, subsection 292A(6)]

Contents of sustainability reports

4.70 An annual sustainability report for a financial year consists of:

•

the climate statement;

•

notes to the climate statement (if any);

•

any statements required in a legislative instrument by the Minister relating to matters concerning environmental sustainability;

•

any notes on statements required in a legislative instrument by the Minister; and

•

the director's declaration about the statements and notes.

[Schedule 4, item 26, subsections 296A(1),(3)(4) and (5)]

4.71 To avoid doubt, nothing in these amendments prevents an entity voluntarily including information that is not legally required by section 296A but that the entity nonetheless considers relevant to sustainability. If voluntary information is included in the sustainability report, this information must be clearly distinguished as a separate voluntary statement (or statements) and state that it is not included in the statements or notes because of a requirement of the legislation. For example, information about an entity's nature, first nations or diversity strategy and performance may be included in a separate voluntary statement or statements in the sustainability report.

4.72 References to the sustainability report here relate only to those disclosures required by legislation.

Climate statements and notes

Climate statements – general contents

4.73 The definition of 'climate statements' references their required contents under the sustainability standards. As the climate statements are to be prepared in alignment with relevant sustainability standards, the specific contents are not prescribed in the Act. The AASB standards are the most appropriate source of information for more granular guidance on climate statements.

[Schedule 4, items 3 and 26, sections 9, 296A and 296B]

4.74 The climate statement of a sustainability report must be prepared in a manner consistent with the relevant sustainability standards made for the purposes of the Act.

[Schedule 4, item 26, subsection 296A(2)]

4.75 Relevant sustainability standards issued by the AASB are expected to align as closely as possible with the relevant standards issued by the ISSB. It is expected that while there will be modifications that are necessary and appropriate to ensure the standards are fit-for-purpose for Australia, the standards would overall align. The ISSB's climate-related disclosure standard sets out four pillars: Governance, Strategy, Risk Management and Metrics and Targets.

4.76 The climate statements for a financial year, along with the notes to the climate statements, must be prepared in a way that together, they disclose all of the following:

•

material financial risks and financial opportunities relating to climate;

•

any metrics and targets for the financial year relating to climate that are required to be disclosed by the sustainability standards made for the purposes of the Act, including scope 1, 2 and 3 emissions of greenhouse gas; and

•

any information about governance of, strategy of, or risk management by the entity in relation to these risks, opportunities, metrics and targets.

4.77 Based on the exposure draft standards issued by the AASB, when preparing sustainability reports, an entity will be required to use all reasonable and supportable information that is available to it at the reporting date without undue cost and effort.

4.78 For Scope 3 emissions reporting, this will mean that entities will not be required to disclose exact data or detailed information that their customers or suppliers cannot provide easily. Entities will also only be required to disclose scope 3 emissions from their second reporting year, and this may comprise information from a reporting year up to 12 months prior to the current period, allowing entities to use information gathered from public disclosures made by other entities in the previous year.

4.79 Draft standards require entities to conduct scenario analysis. The information disclosed in such analysis should enable users of the sustainability report to understand the span of the entity's material risks and opportunities associated with climate change. This includes consideration of both the risks and opportunities associated with responding to the threat of climate change (transition) and those associated with the potential impacts of climate change (physical). Scenario analysis would be expected to inform this understanding.

4.80 The draft standards also indicate entities will not be required to disclose information that is commercially sensitive as defined in the standard.

[Schedule 4, item 26, section 296D]

4.81 Whether something is a material financial risk or financial opportunity relating to climate is determined in accordance with the sustainability standards.

[Schedule 4, item 26, subsection 296D(2)]

Exemption for smaller entities – statement about having no material climate-related risks or opportunities

4.82 It is intended that complete standardised climate disclosures would not be required for smaller in-scope entities that do not have material climate-related financial risks or opportunities.

4.83 In these instances, the entity's climate statement will only include a statement to that effect, as well as an explanation of how it reached this conclusion.

[Schedule 4, item 26, section 296B]

4.84 To understand whether a climate-related financial risk or opportunity is material or not, these entities should consider the sustainability standards that relate to climate. Broadly, material risks and opportunities are those that could reasonably be expected to affect the entity's prospects. The concept of materiality in this instance is expected to be consistent with financial reporting.

4.85 This exemption applies only at the climate statement level, to replace a full climate statement with a shorter statement according to the exemptions. Therefore, the provisions do not exempt the entity from having to complete the sustainability report as a whole, and according to section 296A, including any other statements required by legislative instrument, notes to the statements and the directors' declaration.

4.86 This legislative exemption applies only to the smallest in-scope entities. An entity may rely on this exemption if the following do not apply to the entity:

•

where the entity meets at least two of the following three criteria:

o

the consolidated revenue of the entity (and the entities it controls) is equal to or greater than $200 million;

o

the value of the consolidated gross assets at the end of the financial year of the entity (and the entities it controls) is equal to or greater than $500 million;

o

the entity (and the entities it controls) have at the end of the financial year, 250 or more employees; or

•

if the entity is a registered corporation under the NGER Act or required to make an application to be registered under subsection 12(1) of the NGER Act; or

•

if the entity is a registered scheme, registrable superannuation entity or retail CCIV, where the value of assets at the end of the financial year (including the entities it controls) is equal to or greater than $5 billion.

[Schedule 4, item 26, subsections 296B(1), (2), (4) and (5)]

General rules for applying thresholds

4.87 When counting employees, part-time employees should be taken into account as an appropriate fraction of a full-time equivalent.

[Schedule 4, item 26, subsection 292B(3)]

4.88 Whether something is a material financial risk or financial opportunity relating to climate is determined in accordance with the sustainability standards.

[Schedule 4, item 26, subsection 296B(6)]

4.89 To determine whether an entity controls another entity in relation to sustainability reports, reference is made to the accounting standards made for financial statements, even if these standards do not apply to the entity.

[Schedule 4, item 26, paragraph 292A(7)(a)]

4.90 Calculating consolidated revenue and the value of consolidated gross assets for the purpose of determining if an entity must provide an annual sustainability report must be done in accordance with the accounting standard in force at the relevant time. This is even if the standard does not otherwise apply to the financial year or to some of the entities concerned.

[Schedule 4, item 26, paragraph 292A(7)(b)]

General application of materiality

4.91 For clarity, even if an entity does not meet the thresholds that qualify it to rely on new subsection 296B(1), principles of financial materiality as determined by the relevant sustainability standards still apply. These entities are required to follow the requirements set out in the relevant sustainability standards, made for the purposes of preparing climate statements.

Notes to climate statements

4.92 The notes to a climate statement must include all of the following:

•

any disclosures required by the regulations regarding the preparation of, and contents of the climate statement;

•

any notes required by the sustainability standards made for the purposes of the Act in relation to the preparation of, and contents of the climate statement; and

•

any notes containing other information necessary to ensure that the statement and notes together meet the requirements under new section 296D.

[Schedule 4, item 26, subsections 296A(3), (4) and (5)]

Other statements required by legislative instrument – environmental sustainability-related financial disclosures

4.93 The Minister may make a legislative instrument to require additional statements and notes relating to environmental sustainability-related financial matters to be included as part of the annual sustainability report.

[Schedule 4, item 26, subsection 296A(5)]

4.94 This is necessary to ensure that Australia's sustainability reporting framework can flexibly respond to new and emerging risks and opportunities and to developments in international environmental sustainability-related disclosure standards and frameworks. It is appropriate to use delegated legislation to ensure mandatory disclosure requirements can be expanded quickly in response to the severity of the risks facing the financial market regarding sustainability disclosures. This is consistent with the Government's 'climate first, but not only' policy.

4.95 The legislative instrument would be subject to disallowance and sunset after 10 years and will therefore be subject to appropriate Parliamentary scrutiny.

Compliance with sustainability standards

4.96 The climate statements in the sustainability report must comply with the sustainability standards made for the purposes of the Act, and any further requirements that have been determined in a legislative instrument.

[Schedule 4, item 26, section 296C]

Directors' declaration

4.97 The directors' declaration is a declaration by the directors of their opinion on whether the substantive provisions of the sustainability report are in accordance with the Corporations Act, including in compliance with the relevant sustainability standards (i.e. whether the climate statement is in compliance with the sustainability standards that relate to climate). These declarations must be made with a resolution of the directors, dated, and signed. A transitional provision allowing directors to declare simply that the entity has taken reasonable steps to ensure the substantive provisions of the sustainability report are in accordance with the Act for the first 3 years of the scheme is included in Part 4.

[Schedule 4, items 26 and 145, subsections 296A(6) and (7), and section 1707C]

4.98 To avoid doubt, a directors' declaration must still be made if the climate statement disclosure is a statement about there being no financial risks or opportunities relating to climate in accordance with section 296B.

Providing the sustainability report to members and the public

4.99 Alongside the requirements to provide the financial report, directors' report and auditor's report for a financial year to members, the reporting entity must also provide the sustainability report to members. Where a concise report is provided to members, concise report must contain the full sustainability report.

[Schedule 4, items 27 to 33, headings to Division 4 of Part 2.3M and section 314, subparagraph 314(1)(a)(ia), paragraphs 314(2)(aa) and 314AA(1)(aa), and subsections 316(1) and (3)]

Timing of reporting

4.100 The amendments update the annual reporting requirements to members of a company limited by guarantee by specifying when a sustainability report must be shared with each voting member in the specified timeframes. These are consistent with the existing timing obligations for the sharing of financial reports, directors' reports, and auditor's reports (earlier of 21 days after the AGM or 4 months after the end of the financial year). Minor amendments are made to the numbering of these obligations in the Act accordingly.

[Schedule 4, items 34 to 37, heading of section 316A, paragraph 316A(1)(a), subsections 316A(3) and 316A(5)]

4.101 An entity must make its sustainability report publicly available on its website the day the report is lodged with ASIC, and ensure the report remains available after that day, if it is required to prepare such a report and not required to disclose this report to its members. This obligation aligns with similar obligations to publish annual financial reports on an entity's website (see section 314AA). Failure to comply with this obligation is a strict liability offence.

[Schedule 4, item 38, section 316B]

4.102 Strict liability reduces noncompliance, which enhances the integrity of the regulatory regime enforced by ASIC. Strict liability is appropriate where there is a need to ensure offences are dealt with expeditiously to maintain public confidence in the regulatory regime. As these obligations align with the general record keeping obligations applicable to a reporting entity for providing timely disclosures, the offence provisions are also aligned.

4.103 The strict liability provisions in this Schedule meet all the conditions listed in the Attorney-General's Department's A Guide to Framing Commonwealth Offences, Infringement Notices and Enforcement Powers. For example, the fines for the offences do not exceed 60 penalty units for persons other than a body corporate or 300 penalty units for a body corporate.

[Schedule 4, item 65B, Schedule 3]

4.104 The application of strict liability, as opposed to absolute liability, preserves the defence of honest and reasonable mistake of fact.

4.105 Similar to financial reports, directors' reports and auditor's reports, the directors of a public company that is required to hold an AGM must also lay the sustainability report before the AGM.

[Schedule 4, item 39, paragraph 317(1)(aa)]

4.106 Similar to financial reports, directors' reports and auditor's reports, a company or disclosing entity that was a borrower in relation to debentures at the end of a financial year must give a copy of the sustainability report to the trustee for debenture holders. A debenture holder may ask the company or disclosing entity that issued debentures for copies of a sustainability report if one was required to be prepared.

[Schedule 4, items 40 and 41, subsection 318(1) and paragraph 318(2)(b)]

4.107 Consequential amendments are also made regarding re-lodgement if sustainability reports are amended after lodgement, in a manner consistent with the re-lodgement of financial reports and director's reports.

[Schedule 4, items 42 to 46, headings to section 322 and subsections 322(1) and 322(2A), subsection 322(1), and paragraph 322(2A)(a)]

ASIC directions

4.108 If ASIC considers that a statement an entity makes in a sustainability report is incorrect, incomplete or misleading in any way, ASIC may direct the entity, in writing, to do any of the following:

•

confirm to ASIC that the statement is correct or complete;

•

explain the statement to ASIC;

•

give to ASIC information or documents that could substantiate or support the statement;

•

correct, complete or amend the statement in accordance with the direction;

•

if directed to correct, complete or amend the statement, publish the corrected, completed, or amended statement in accordance with the direction; and

•

if directed to correct, complete or amend the statement, give the corrected, completed, or amended statement to specified persons in accordance with the direction.

[Schedule 4, item 26, subsection 296E(1)]

4.109 To avoid doubt, ASIC may make a single direction in relation to one or more statements in a sustainability report. A single direction may also include directions to an entity to do one or more of the things listed in subparagraphs (d) to (h).

4.110 The entity must comply with a direction within the time specified in the direction (which must be a reasonable time), or within a reasonable time if none is specified. ASIC may extend the time within which the entity must comply by written notice given to the entity. The penalty for a failure to comply with such direction is 60 penalty units, and this offence is one of strict liability.

[Schedule 4, items 26 and 76, subsections 296E(2), (3) and (8), and Schedule 3]

4.111 Strict liability reduces noncompliance, which enhances the integrity of the regulatory regime enforced by ASIC. Strict liability is appropriate where there is a need to ensure offences are dealt with expeditiously to maintain public confidence in the regulatory regime. As these obligations align with the general obligations applicable to a reporting entity to follow the directions of the regulator, the offence provisions are also aligned.

4.112 The strict liability provisions in this Schedule meet all the conditions listed in the Attorney-General's Department's A Guide to Framing Commonwealth Offences, Infringement Notices and Enforcement Powers. For example, the fines for the offences do not exceed 60 penalty units for persons other than a body corporate or 300 penalty units for a body corporate.

[Schedule 4, item 76, Schedule 3]

4.113 The application of strict liability, as opposed to absolute liability, preserves the defence of honest and reasonable mistake of fact.

4.114 Before giving the entity a notice to correct, complete, or amend the statement, ASIC must give the entity an opportunity to appear or be represented at a hearing before ASIC that takes place in private, or to make submissions to ASIC on the matter. To provide a framework with procedural fairness to the entity, the amendments require ASIC to provide opportunity for the entity to be heard or make submissions on the matter.

[Schedule 4, item 26, subsection 296E(4)]

4.115 ASIC may vary or revoke these directions by giving written notice to the entity. The varied direction may be subject to similar conditions as the original direction.

[Schedule 4, item 26, subsections 296E(5) and (6)]

4.116 ASIC must give notice of the giving, varying, or revoking of a direction to correct, complete or amend a statement by publishing on its website. This is intended to provide clarity to the public about ASIC's enforcement approach, including what statements within a sustainability report are not considered appropriate.

[Schedule 4, item 26, subsection 296E(7)]

Product disclosure

4.117 The prospectus for continuously quoted securities or a Product Disclosure Statement relating to a managed investment scheme that is an ED security must inform people of their right to obtain a copy of the most recently lodged sustainability report if the body has lodged a sustainability report with ASIC. The contents of an offer information statement for the issue of a body's securities must include a copy of the most recent sustainability report prepared. That sustainability report must comply with the sustainability standards, and be audited. [Schedule 4, items 53, 54, 55 and 57, subparagraphs 713(4)(a)(ia) and 1013I(3)(a)(ia) , paragraph 715(1)(ia), and subsection 715(2A) ]

4.118 However, for continuously quoted securities that are not securities of a notified foreign fund passport, the information is not required to be included in the Product Disclosure Statement if the issuer of the product has lodged a sustainability report with ASIC that contains the information.

[Schedule 4, item 56, subparagraph 1013FA(2)(a)(ia)]

4.119 Issuers for superannuation products relating to a registrable superannuation entity must give a concerned person a copy of the sustainability report the entity has prepared for the financial year if the concerned person made the request in writing. The term 'concerned person' is defined in subsection 1017C(9). This requirement already applies to the financial report, directors' report, and auditor's report on the financial report, of the entity for a specified financial year.

[Schedule 4, item 58, paragraph 1017C(3AA)(aa)]

Sustainability reporting by CCIVs

4.120 Consequential amendments relating to corporate finance and financial reporting for CCIVs are made to support the new sustainability reporting requirements.

[Schedule 4, items 61, 63 and 64, headings to Part 8.4B, Division 4 of Part 8B.4, Subdivision C of Division 4 of Part 8B.4, and section 1232C]

4.121 Financial reporting provisions in Part 2M.3 that apply to CCIVs are also updated to include sustainability reports. This means if a CCIV meets the thresholds for sustainability reports (see above), the remaining provisions relating to financial reporting requirements of Division 1 of Part 2M.3 also apply to CCIVs in relation to sustainability reports and the documents of which a sustainability report consists in the Act.

[Schedule 4, items 62, 65, 66 and 67, subsection 1232(1) and paragraphs 1232C(1)(aa), 1232C(2)(a), 1232C(2)(b) and 1232C(2)(c), and item 59, table item 15 of section 1222M]

4.122 A sustainability report for a sub-fund must comply with further requirements prescribed by regulations made for the purposes of annual financial reports and directors reports for sub-funds in CCIVs. The heading to the section is changed to reflect this.

[Schedule 4, items 68 and 69, heading to section 1232D and subsection 1232D(4)]

4.123 Annual financial reporting requirements for companies, registered schemes and disclosing entities apply to a retail CCIV in relation to each of its sub-funds as if the requirement were a requirement to report to members of the sub-fund for the year. The requirement to report includes a sustainability report as well as a financial report and director's report and the auditor's report on the financial report. The amendment reflects the fact the auditor reports on the financial report itself.

[Schedule 4, items 70 and 71, heading to section 1232H, and subparagraph 1232H(1)(a)(i)]

4.124 Requirements to relodge if a financial statement or directors' report relating to a sub-fund is amended after lodgement also applies to sustainability reports.

[Schedule 4, items 72 and 73, heading to section 1232M and section 1232M]

Penalty provisions

4.125 Consequential amendments are made to Schedule 3 which list the penalty provisions under the amendments in Part 1, specifically in relation to the new obligations to keep sustainability records (subsections 286A(1) and (2)), including the place where sustainability records are kept (subsections 289A(2), 289A(4) and 289A(7)), and the obligation to make sustainability reports publicly available (subsection 316B(1)). The amendments also insert a penalty for contravention of obligations relating to complying with a member's request for a full financial report and auditor's report from a company, registered scheme or disclosing entity (subsection 316A(3A). Finally, a penalty is introduced for non-compliance with an ASIC direction to correct, amend or otherwise substantiate a statement (subsection 296E(2)).

[Schedule 4, items 74 to 78, table items in Schedule 3 and table item under Schedule 3 dealing with subsections 316A(3) and (4), column headed "Provision"]

Part 2 – Audit and assurance

4.126 Similar to the annual financial reporting obligations in the Corporations Act, the sustainability report will be subject to mandatory audit requirements, in accordance with auditing standards. The auditor of a sustainability report has the same obligations as the auditor of a financial report, and should be supported by technical climate and sustainability experts where appropriate.

4.127 The definitions of 'auditor's report' in section 9 of the Act is amended to include references to an audit of a sustainability report in addition to a financial report. Audit refers to an either an audit or review conducted for the purposes of this Act.

[Schedule 4, item 79, section 9]

4.128 Part 2 sets out the enduring audit requirements for the sustainability report, which much be audited in accordance with the provisions for the contents of the sustainability report. Initially, the sustainability report will only be required to be reviewed or audited to the extent required by the audit standards made by the AUASB. Over time these standards are expected to evolve in terms of both the extent and level to which disclosures in the sustainability report will need to be assured, reverting to the enduring provisions from 1 July 2030 (transitional provisions are set out in Part 4).

Audit of a sustainability report

4.129 The overview of annual financial reporting obligations for companies, registered schemes, registrable superannuation entities and disclosing entities now include the requirements to have a sustainability report audited and to obtain an auditor's report. The overview references the relevant provisions for ease of navigation.

[Schedule 4, item 90, table item 1B of the table under subsection 285(1)]

4.130 An entity required to prepare a sustainability report for a financial year must have the sustainability report audited and obtain an auditor's report in accordance with the Act. A Note to the section points to the transitional provisions for auditing set out in Part 4, for financial years commencing before 1 July 2030.

[Schedule 4, item 94, section 301A]

4.131 To avoid doubt, where an entity's climate statement for the year is only a statement that the entity has no material climate risks or opportunities, this statement must also be audited.

4.132 Consequential amendments update various references to reflect the additional sustainability reporting requirements, including updates from the singular 'auditor's report' to 'any auditor's reports'. The amendments also include the business of an AGM to consider relevant reports so an 'auditor's reports' are included instead of a single auditor's report. A similar update is made in the table providing the overview of financial reporting obligations for companies, registered schemes, registrable superannuation entities and disclosing entities.

[Schedule 4, items 80 to 89, , 91, 92, 93, 95 and 99, note 1 to subsection 250N(3), paragraphs 250PA(1)(a) and 250PA(1)(b), paragraphs 250R(1)(a), 250RA(1)(a) and 250RA(3)(c), subparagraphs 250T(1)(a)(i), (ii), (iiia), and (iv), table items 4, 5 and 6 of the table under subsection 285(1), and headings to Division 3 of Part 2M.3 and section 307B]

4.133 Further amendments change the wording of two headings to distinguish the sections relating to audits of financial reports.

[Schedule 4, items 96 and 97, headings to sections 307 and 307A]

Auditor's opinion

4.134 An auditor who conducts an audit of the sustainability report for a financial year must form an opinion on whether the sustainability report complies with the Corporations Act, including whether it complies with the sustainability standards (section 296C) and the climate statement disclosures (section 296D) requirements. If not, the auditor must specify why. The auditor must also form an opinion about whether the auditor has been given all information, explanation and assistance necessary for the conduct of the audit and whether the entity has kept sufficient sustainability records to support the preparation and audit of the sustainability report. A Note to this section points to the modification of the operation of this section to retail CCIVs in section 1232G.

[Schedule 4, item 98, section 307AA]

4.135 If an individual auditor or company conducts an audit of the sustainability report, the individual or company must conduct the audit in accordance with auditing standards. The lead auditor of the firm or audit company conducting a review must ensure the audit or review is conducted in accordance with the standards. Contravention of this requirement is both a fault-based offence (with a penalty of 2 years imprisonment) and one of strict liability (with a penalty of 50 penalty units).

[Schedule 4, item 98, section 307AB]

Working papers for the audit of a sustainability report

4.136 In line with the requirements for financial reports, an auditor contravenes the retention requirements for audits of sustainability reports if they do not retain all audit working papers prepared by or for, or considered or used by, the auditor in accordance with the requirement of the working standards at the end of 7 years after the report or an earlier date ASIC would determine. Contravention is an offence of strict liability. If audit working papers are in electronic form they are taken to be retained if they are convertible into a hard copy.

[Schedule 4, items 99, 100 and 101, heading to section 307B, subparagraphs 307B(1)(b)(ii) and (iii)]

4.137 A person contravenes this retention requirement if they were a member of the audit firm at the time it contravened its obligations in relation to the document retention period. Contravention is an offence of strict liability. However, under existing section 307B(5), a member of an audit firm does not commit an offence if the member did not know at the time of the circumstances there was a contravention or knew of the circumstances at the time, but took all reasonable steps to correct the contravention as soon as the member became aware of the circumstances.

[Schedule 4, items 102 and 103, subparagraphs 307B(3)(a)(ii) and (iii)]

Auditor's independence

4.138 An individual auditor conducting an audit or a review of the sustainability report must give directors of the entity a written declaration that to the best of the individual auditor's knowledge, there have been no contraventions of auditor independence requirements of this Act in relation to the audit or review, and no contraventions of any applicable code of professional conduct in relation to the audit. Otherwise, the auditor must provide a written declaration that to the best of their knowledge and belief, the only contraventions are contraventions which are set out in the declaration. Not providing a declaration is an offence of strict liability. The same requirements apply to the lead auditor of an audit firm or company conducting an audit of a sustainability report.

[Schedule 4, items 104 to 107, paragraphs 307C(1)(ba) and 307C(3)(ba), subsection 307C(5A) and paragraph 307C(5A)(c)]

Auditor's report

4.139 The auditor's report must include statements or disclosure required by the auditing standard and a report must specify the date on which it is made. If the sustainability report includes any additional information under paragraph 296A(3)(c), which concerns the inclusion of notes, the auditor's report must also include a statement of the auditor's opinion on whether the inclusion of that additional information was necessary to make the disclosures required by sections 296D.

4.140 The auditor's report must also describe any defect or irregularity and deficiencies, failures or shortcomings that may have arisen if they were not given the information, explanation and assistance necessary to complete the audit.

4.141 Contravention of subsections 309A(1) (relating to reporting to members as to whether the audit is in compliance with the sustainability standards and the climate statement disclosures) and 309A(3) (relating to reporting to members on whether the sustainability report is otherwise noncompliant) are offences of strict liability.

[Schedule 4, item 108, section 309A]

Providing auditor's report to members and the public

4.142 An entity must report to members for a financial year by providing an auditor's report on the sustainability report for the year (in addition to the financial report, director's report and auditor's report on the financial report). Under section 314AA, a company may instead provide a concise report to satisfy this requirement. An amendment is made to ensure the concise report includes the auditor's report on the sustainability report.

[Schedule 4, items 109 and 110, subparagraph 314(1)(a)(iv) and paragraph 314(2)(da)]

4.143 Similarly, a registrable superannuation entity must report to members by providing an auditor's report on the sustainability report for the year (in addition to the financial report, director's report and auditor's report on the financial report).

[Schedule 4, item 111, paragraph 314AA(1)(d)]]

4.144 Issuers of financial products that are superannuation products relating to registrable superannuation entities must, on written request from a concerned person, give the person a copy of the auditor's report for the financial year and a copy of the auditor's report on the sustainability report.

[Schedule 4, item 121, paragraphs 1017C(3AA)(c) and (d)]

4.145 If a company limited by guarantee obtains an auditor's report on the sustainability report, the company must send a copy of the report to each member who has made an election for that year. The report must be sent the earlier of 21 days before the next AGM after the end of the financial year, or 4 months after the end of the financial year. The copy of the report must be free of charge for members. Contravention is an offence of strict liability. The penalty amount for this offence is set at 30 penalty units through an amendment to Schedule 3 which sets out penalties.

[Schedule 4, items 113 and 114, subsections 316A(3B) and 316A(5), and item 127, Schedule 3]

4.146 The amendments update consideration of reports at AGMs and additional reporting by debenture issuers by changing the singular term 'report' into a plural, reflecting the addition of the auditing of sustainability reports.

[Schedule 4, items 115 and 116, paragraphs 317(1)(c) and 318(2)(b)]

4.147 Members of listed companies entitled to cast votes may also submit written questions to auditors that are relevant to the conduct of the audit of annual sustainability reports as well as financial reports.

[Schedule 4, item 82, paragraph 250PA(1)(b)]

Auditor's power to obtain information

4.148 The auditor's power to obtain information from a controlled entity is updated to include the power to obtain sustainability reports including consolidated climate statements. Auditing standards are also updated to apply to sustainability reports.

[Schedule 4, item 117, subsections 323A(1)]

Relevant audit standard

4.149 The AUASB may, by legislative instrument, make auditing standards for the purpose of this Act. This applies to the auditing of financial reports and extends to sustainability reports.

4.150 If the AUASB makes an auditing standard and the standard applies to sustainability reports in relation to particular periods and an auditor is conducting an audit of a sustainability report in relation to a period occurring before the start of the earliest of those periods, the auditor may elect to apply the auditing standard to that audit unless the standard says otherwise. The election must be recorded in the auditor's report.

[Schedule 4, items 118 and 119, subsections 336(3) and 336(5)]

4.151 To avoid doubt, the auditing standard may refer to either an audit, or review, or both.

4.152 It is necessary and appropriate for the AUASB to develop auditing standards for sustainability reports as they have the experience and understanding to effectively develop these. It would not be appropriate for the inflexibility of primary legislation to provide for auditing standards as these standards are updated from time to time to ensure they respond to new industry conditions and frameworks.

CCIVs

4.153 The requirement to audit a financial report applies to CCIVs in relation to sustainability reports for each sub-fund. Subject to modifications relevant to CCIVs, Division 3 of Part 2M.3 applies to sub-funds of retail CCIVs and in relation to sustainability reports for CCIVs.

[Schedule 4, items 122, 123 and 124, subsection 1232D(2A), paragraph 1232(1)(aa) and subparagraph 1232H(1)(a)(ii)]

Offences

4.154 Several new strict liability offences are added to support the new auditing and assurance requirements, as outlined above. Strict liability is appropriate in these circumstances, as it is necessary to strongly deter misconduct that can cause serious detriment to investors and regulators relying on auditors' compliance with core obligations in the Act. Further, the specialised role of auditors means that it is appropriate for a person to be penalised if they contravene these requirements by not complying with the strict requirements to conduct an audit in line with relevant standards, not retaining audit records as required or not providing the necessary declarations in relation to auditor independence requirements or adherence to codes of professional conduct. Additionally, the strict liability offences mirror similar offences relating to the framework for financial reporting.

4.155 The strict liability offences in this Schedule meet all the conditions listed in the Attorney-General's Department's A Guide to Framing Commonwealth Offences, Infringement Notices and Enforcement Powers. For example, the fines for the offences do not exceed 60 penalty units for persons other than a body corporate or 300 penalty units for a body corporate.

4.156 The application of strict liability, as opposed to absolute liability, preserves the defence of honest and reasonable mistake of fact.

4.157 Schedule 3 sets out penalties for offences in the Act. Schedule 3 of the Act is updated to reflect the addition of the new offences relating to the new requirements for auditing and assuring sustainability reports.

[Schedule 4, items 125, 126 and 127, table items in Schedule 3 and table item under Schedule 3 dealing with subsections 316A(3) and (4), column headed "Provision"]

Part 3 – Sustainability and auditing standards

Standard setting powers

AASB's functions

4.158 Schedule 4 to the Bill amends the ASIC Act to empower the AASB to make sustainability standards under section 336A. These sustainability standards are given legal effect by amendments to the Corporations Act.

[Schedule 4, items128 to 131, paragraphs 227(1)(ba) and 227(1)(ca) of the ASIC Act, notes 2 and 3 to subsection 227(1) of the ASIC Act, and note 1 to subsection 227B(1) of the ASIC Act]

4.159 The relevant sustainability standards under section 336A of the Corporations Act, similar to accounting standards, are legislative instruments. These sustainability standards are limited in scope as they must not be inconsistent with the Corporations Act or the regulations.

[Schedule 4, item 140, subsection 336A(1)]

4.160 To avoid doubt, until such time as additional statements are required by the Minister to be included in the sustainability report, the relevant sustainability standards are those that are made for the purposes of the climate statement (i.e. containing climate-related financial disclosure only), in line with subsection 296D. Consistent with the policy outcomes of the amendments under Schedule 2 to the Treasury Laws Amendment (2023 Measures No. 1) Act 2023, the AASB maintains the function to formulate sustainability standards, (subsection 227(b) of the ASIC Act refers).

4.161 Sustainability standards made by the AASB for other purposes will be voluntary standards until such time as any additional statements are required to be made in the sustainability report in the Corporations Act. These standards could be used where entities elect to disclose additional information in the sustainability report. The amendments leverage the AASB's experience to facilitate the development of sustainability-related and climate-related financial disclosure standards and to, as much as is practicable, align with the global baseline standards released by ISSB (IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information and IFRS S2 Climate-related Disclosures) in June 2023.

AUASB's functions

4.162 To avoid doubt, no amendments to the AUASB's functions in the ASIC Act are necessary to provide the AUASB with the powers to make legally binding audit and assurance standards for the purposes of sustainability. Paragraph 227B(1)(a) already provides the AUASB with the powers to make auditing standards under section 336 of the Corporations Act. This includes for the purposes of the sustainability report under these amendments (see paragraph 336(1)).

4.163 Consistent with the policy outcomes of the amendments under Schedule 2 to the Treasury Laws Amendment (2023 Measures No. 1) Act 2023, the AUASB maintains the function to formulate auditing and assurance standards for sustainability and other purposes (see subsection 227B(b) of the ASIC Act).

Mandatory auditing and assurance standards

4.164 For the AUASB and AASB to make legally applicable standards there must also be provisions in the Corporations Act to that effect.

4.165 To provide AASB with the power to make sustainability standards for the purposes of this Act, the amendments add new section 336A, which sets out similar powers to the existing provisions for accounting standards. The term 'sustainability' is added to the heading for the existing provisions that relate to the AASB's powers to make accounting standards in recognition of this addition.

[Schedule 4, items 134 and 140, heading to Part 2M.5 and subsection 336A)]

4.166 To support the amendments, a new definition for the term 'sustainability standard' has been added to mean a standard in force under section 336A of the Act or a provision of such a standard as it so has effect.

[Schedule 4, item 133, section 9, definition of 'sustainability standard']

4.167 Similarly, to clarify that the AUASB has power to make auditing standards and that this power applies to sustainability reports, 'sustainability' is added after 'financial' in section 336, which refers to auditing standards.

[Schedule 4, item 139, section 336)]

4.168 To avoid doubt, the auditing standard may refer to either an audit, or review, or both. Deeming provisions in the application provisions ensure that where appropriate, for the transitional period, as sustainability reports are required to be reviewed and not audited, the references to audit include the reference to 'review'.

[Schedule 4, item 145, section 1707E]

4.169 In support of the amendments, the definition of 'commencement' in relation to an accounting standard or sustainability standard is replaced in light of the amendments and is defined as either of the following:

•

In the case of an accounting standard or sustainability standard as originally in effect – the time when the accounting standard or sustainability standard took effect;

•

In the case of an accounting standard or sustainability standard as varied by a particular provision of an instrument – the time when the provision took place.

[Schedule 4, item 132, section 9]

4.170 These standards apply to periods that end after the standard commences or at a later period or date as specified in the standard. Companies, registered schemes, registrable superannuation entities or disclosing entities can also elect to apply sustainability standards earlier in writing by directors, unless restricted by the relevant standard.

[Schedule 4, item 140, subsections 336A(2) and (3)]

4.171 Consequential amendments are made to insert references to the ASIC Act in provisions concerning accounting standards and auditing standards to ensure compliance with both Acts.

[Schedule 4, items 135 to 138, subsections 334(1) and 336(1)]

4.172 Provisions relating to the text and interpretation of accounting standards and auditing standards are extended to also apply to sustainability standards.

[Schedule 4, items 141 to 144, heading to section 337, section 337, heading to section 338, paragraph 338(1)(a)]

Part 4 – Application and transitional provisions

4.173 The amendments modify existing liabilities and offences that apply generally to corporate reporting for a transitional period. This provides entities time to adjust and build capability in relation to the new reporting requirements to disclose information relating to climate-related financial risks and opportunities in line with the relevant sustainability standards.

4.174 Definitions are included for the following terms:

•

'start date' is defined in relation to the passage of the Bill through Parliament as this section commences the day after the Bill receives Royal Assent (see commencement section). This is to allow sufficient lead time for entities to prepare for the first reporting period.

•

'first transitional period' is the period that starts on the start date, and ends on 30 June 2026 (but if the start date is after 1 July 2025, then there is no first transitional period);

•

'second transitional period' is the period that starts on 1 July 2026, and ends on 30 June 2027.

[Schedule 4, item 145, section 1707]

Sustainability records

4.175 If an entity keeps its sustainability records outside this jurisdiction the entity must notify ASIC of the place where those records are kept (see section 289A above). If the entity would be required to give notice on a date that is less than 12 months after the commencement of section 1707A, the date on which notice is required is instead the date 12 months after the commencement of that section.

[Schedule 4, item 145, subsection 1707A(1)]

4.176 On the commencement of section 1707A, if an entity already keeps information in this jurisdiction for the purposes of subsection 289(2), that entity is taken to not keep information at that place for that purpose immediately prior to the commencement, and is treated as beginning to keep information at that place for that purpose on commencement.

[Schedule 4, item 145, subsection 1707A(2)]

4.177 These provisions together have the effect that entities keeping sustainability records outside this jurisdiction (whether before or after commencement of the section) are required to give ASIC notice of the place inside the jurisdiction that they keep the necessary written information no earlier than 12 months after that commencement.

Phasing in in-scope entities

4.178 Under the transitional rules, entities required to prepare sustainability reports are separated into three groups and their obligations are generally phased-in across a number of financial years, generally dependent on size:

•

Entities that are in Group 1 must prepare an annual sustainability report for the financial year that commences during the first transitional period (reflective of paragraph 1707B(1)(a));

•

Entities that are in Group 2 must prepare annual sustainability reports for the financial year that commences during the second transitional period (reflective of paragraph 1707B(1)(b) which references thresholds set out in subsections 296B(2), (4) and (5));

•

All entities to which the new requirements apply (Group 3) (see Part 1 of this Chapter of the explanatory memorandum, under 'Who has to prepare annual sustainability reports') must prepare an annual sustainability report for each financial year that commences on or after 1 July 2027 (reflective of paragraph 1707B(1)(c)).

[Schedule 4, item 145, section 1707B]

4.179 The thresholds for each group of entities (Group 1, Group 2 and all relevant entities) that is required to report are progressive. Therefore the entities in Group 2 are a subset of those generally required to report; and the entities in Group 1 are a subset of the entities in Group 2.

Group 1 – Largest entities and NGER reporters (above the publication threshold)

4.180 A Group 1 entity is any of the following:

•

an entity which meets at least two of the following three criteria:

o

the consolidated revenue of the entity (and the entities it controls) is equal to or greater than $500 million;

o

the value of the consolidated gross assets at the end of the financial year of the entity (and the entities it controls) is equal to or greater than $1 billion;

o

the entity (and the entities it controls) have at the end of the financial year, 500 or more employees; or

•

an entity that is a registered corporation under the NGER Act or required to make an application to be registered under subsection 12(1) of the NGER Act and that meets a publication threshold in subsection 13(1) of the NGER Act.

[Schedule 4, item 145, subsections 1707B(1)(a), (2) and (4)]

4.181 However, even if it meets the criteria, an entity which is a registered scheme, registrable superannuation entity, or retail CCIV is not a Group 1 entity.

[Schedule 4, item 145, paragraphs 1707B(2)(b) and 1705(4)(c)]

Group 2 – Second largest entities, asset owners and all other NGER reporters

4.182 A Group 2 entity is any of the following:

•

an entity that meets at least two of the following three criteria:

o

the consolidated revenue of the entity (and the entities it controls) is equal to or greater than $200 million;

o

the value of the consolidated gross assets at the end of the financial year of the entity (and the entities it controls) is equal to or greater than $500 million;

o

the entity (and the entities it controls) have at the end of the financial year, 250 or more employees; or

•

an entity that is a registered corporation under the NGER Act or required to make an application to be registered under subsection 12(1) of the NGER Act; or

•

an entity that is an asset owner (registered scheme, registrable superannuation entity, or retail CCIV) where the value of assets at the end of the financial year (including the entities it controls) is equal to or greater than $5 billion.

[Schedule 4, item 145, subparagraph 1707B(1)(b)]

Group 3 – all other in-scope entities

4.183 A Group 3 entity is an entity that meets at least two of the following three criteria:

•

the consolidated revenue of the entity (and the entities it controls) is equal to or greater than $50 million;

•

the value of the consolidated gross assets at the end of the financial year of the entity (and the entities it controls) is equal to or greater than $25 million;

•

the entity (and the entities it controls) have at the end of the financial year, 100 or more employees.

4.184 This is consistent with and intended to catch all other entities to which the new requirements apply (see Part 1 of this Chapter of the explanatory memorandum, under 'Who has to prepare annual sustainability reports') and who must prepare an annual sustainability report for each financial year.

[Schedule 4, item 145, subparagraph 1707B(1)(c)]

General rules for applying thresholds

4.185 When counting employees, part-time employees should be taken into account as an appropriate fraction of a full-time equivalent.

[Schedule 4, item 145, subsection 1707B(3)]

4.186 To determine whether an entity controls another entity in relation to sustainability reports, reference is made to the accounting standards made for financial statements, even if these standards do not apply to the entity. (see also Part 1 of this explanatory memorandum, under 'Who has to prepare annual sustainability reports').

[Schedule 4, item 145, subsection 1707B(5)(a)]

4.187 Calculating consolidated revenue and the value of consolidated gross assets for the purpose of determining if an entity must provide an annual sustainability report must be done in accordance with the accounting standard in force at the relevant time. This is even if the standard does not otherwise apply to the financial year or some of the entities concerned. (see also Part 1 of this explanatory memorandum, under 'Who has to prepare annual sustainability reports').

[Schedule 4, item 145, subsection 1707B(5)(b))]

Directors' declaration

4.188 With respect to financial years which commence during the three years starting on the start date, the requirement for the director to declare in their opinion that the sustainability report complies with the standards and is made in accordance with requirements for climate statement disclosures applies as if the reference to that opinion includes the director's opinion on whether the entity had taken reasonable steps to ensure the substantive provisions of the sustainability report are in accordance with the Act.

[Schedule 4, item 145, section 1707C of the Act]

Modified liability – three years

4.189 Transitional provisions provide that liability for misleading and deceptive, and other, conduct in relation to the most uncertain parts of a climate statement (defined as 'protected statements') is temporarily protected.

4.190 This limited immunity applies to protected statements in relation to sustainability reports prepared for financial years commencing during the three years starting on the start date (see definition in section 1707). During this time, only ASIC will be able to take action for misleading and deceptive conduct in relation to these types of disclosures.

[Schedule 4, item 145, section 1707D]

4.191 No action, suit or proceeding (collectively 'legal actio n') is able to be brought against a person or entity in relation to protected statements or statements required under a Commonwealth law that are substantively protected statements (for example, a reproduction of a protected statement in a Product Disclosure Statement). However, this does not prevent criminal proceedings or proceedings brought by ASIC.

[Schedule 4, item 145, subsections 1707D(1) and (2)]

4.192 This modified liability applies in relation to protected statements. For the purpose of modified liability, a protected statement is:

•

a statement within a sustainability report prepared for a financial year commencing during the three years starting on the start date, or an auditor's report of audits or reviews of such sustainability reports that is also about any of the following:

o

scope 3 greenhouse gas emissions (including financed emissions)

o

scenario analysis made in those sustainability reports; or

o

a transition plan (within the meaning the sustainability standards).

[Schedule 4, item 145, subsection 1707D(3)]

4.193 To avoid doubt, the modified liability protections described in section 1707D extend to all sustainability reports, whether or not required to be prepared, if the statement was made in compliance with the sustainability standards, the Act, or the auditing standards. Entities seeking to rely on this protection should ensure they make this explicit in their sustainability report.

4.194 The most common legal actions likely to be affected are civil proceedings for misleading or deceptive conduct. For example, proceedings under sections 1041E or 1041H. Alleged breaches of directors' duties are protected (for example, actions under section 344).

4.195 The protection applies generally and extends to other forms of alleged misconduct in making climate-related disclosures related to scenario analysis, transition plans or scope 3 emissions including actions such as negligent misstatement, breach of statutory duty and breach of fiduciary duties.

4.196 The policy intention is to ensure that during the transitional period, ASIC can undertake a role that promotes education about compliance with the new reporting regime and deter poor behaviours and reporting practices that are contrary to the objectives of the new reporting regime.

Modified liability – one year for forward-looking statements

4.197 Modified liability is also extended to cover all forward-looking statements, related to climate and made for the purpose of complying with sustainability standards, if they are made in sustainability reports for financial years commencing within the first 12 months starting on the start date.

[Schedule 4, item 145, subsection 1707D(4)]

4.198 This extends to statements made in an auditors' report of an audit or review of a sustainability report for financial years commencing during the 12 months starting on the start date, which relates to climate and was made for the purpose of complying with a sustainability standard.

[Schedule 4, item 145, paragraph 1707D(4)(ii)]

4.199 The liability is modified in the same way as for the other protected statements, described above.

[Schedule 4, item 145, subsection 1707D(4)]

Phasing in auditing and review requirements

4.200 The AUASB must make auditing standards in accordance with the Act that specify the extent to which sustainability reports for financial years commencing on or before 30 June 2030 must be audited and/or reviewed, and provide standards for such audits and reviews.

[Schedule 4, item 145, subsection 1707E(2)]

4.201 The requirement to 'audit' annual sustainability reports and to obtain an auditor's report includes the requirement to have those reports reviewed and audited to the extent the auditing standards require.

[Schedule 4, item 145, subsection 1707E(3)]

4.202 If the AUASB makes auditing standards that require a sustainability report to be reviewed to any extent:

•

The reference to 'audit' in this Act will generally include a reference to a review of a sustainability report; and

•

a reference to 'an auditor's report' will include a reference to an auditor's report in accordance with the requirement to review sustainability reports before 1 July 2030

4.203 The exceptions to this interpretative aid are in the specific provision requiring the audit of a sustainability report and the provision specifically dealing with the auditor's report on the sustainability report.

[Schedule 4, item 145, subsection 1707E(4) ]

4.204 The amendment also provides guidance on how the provisions concerning the audit of a sustainability report interact with provisions concerning the audit or review of sustainability reports before 1 July 2030. The application of these provisions is amended to account for the fact auditors will need an adjustment period to get used to complying with the new reporting standards.

•

An auditor forming an opinion on whether the sustainability report is in accordance with existing sustainability standards and requirements for climate statement disclosures is only required to form such an opinion to the extent required by the auditing standards.

•

When forming an opinion whether the entity that prepared the sustainability report has kept sustainability records sufficiently to enable the sustainability report to be prepared and audited, the reference to audited only references auditing to the extent the auditing standards require.

[Schedule 4, items 98 and 145, section 307AA and subsection 1707E(5) ]

4.205 The requirements around an auditor's report on a sustainability report apply as if references to the auditor's opinion that the sustainability report in in accordance with the Act references whether the auditor is of the opinion the sustainability report, to the extent it is required to be audited, is in accordance with the Act.

[Schedule 4, items 108 and 145, subsection 309A(1) and 1707E(6) ]

4.206 An auditor who reviews sustainability reports before 1 July 2030 must report to members on whether the auditor becomes aware of any matter in the course of the review that makes the auditor believe the sustainability report, to the extent it is required to be reviewed by the auditing standards, does not comply with the Act. Any such report must be in compliance with the standards. Such a report must be dated, and non-compliance with any of the requirements in drafting this report will be an offence of strict liability. The penalty amount for this offence is set at 50 penalty units through an amendment to Schedule 3 which sets out penalties.

[Schedule 4, items 145 and 146, section 1707F and table item in Schedule 3]

4.207 A finding of non-compliance in the course of reviewing the sustainability report must describe the non-compliance and specify why the matter would make the auditor believe the sustainability report does not comply with the Act to the extent it is required to be reviewed by auditing standards.

[Schedule 4, item 145, subsection 1707F(3)]

4.208 The auditor's report must include any statements or disclosures the auditing standards require for the purposes of this section.

[Schedule 4, item 145, subsection 1707F(4)]

Review of laws

4.209 To ensure sufficient Ministerial and Parliamentary oversight of this legislation which implements new obligations and reports for a significant cohort of entities, Schedule 4 must undergo a review.

4.210 As soon as practicable after 1 July 2028, a review of the legislation and written report of the outcomes must be prepared. After the report is provided to the Minister, it must be tabled in each House of the Parliament within 15 sitting days of that House.

[Schedule 4, item 145, section 1707G]

4.211 This review forms an integral piece in ensuring that new legislation and frameworks are operating effectively and in accordance with the intended outcomes. It provides an opportunity for further refinement of legislation where recommendations are provided, and Parliamentary oversight of the process.

Commencement, application, and transitional provisions

4.212 Schedule 4 to the Bill commences the day after Royal Assent.

4.213 Under the amendments, the requirement to prepare a sustainability report will be progressively phased in for different cohorts, generally based on the size of the entity. An explanation of this phased-in approach is explained in Part 4 of this Chapter, regarding application provisions.

Chapter 5: Statement of Compatibility with Human Rights

Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.

Treasury Laws Amendment (Financial Market Infrastructure and Other Measures) Bill 2024

Schedules 1-3 & 5 — Strengthening Australia's Financial Market Infrastructure regulatory framework

5.1 Schedules 1, 2 and 3 to the Bill implement recommendations of the CFR Advice to Government to strengthen Australia's financial market infrastructure.

Overview

5.2 Schedules 1, 2 and 3 to the Bill are compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.

5.3 Schedules 1, 2 and 3 to the Bill implement recommendations of CFR Advice to Government to strengthen Australia's financial market infrastructure.

5.4 Schedules 1, 2 and 3 to the Bill implement the recommendations by:

•

introducing a crisis management and resolution regime through the amendments in Schedule 1;

•

enhancing ASIC and the RBA's licensing, supervisory and enforcement powers in Schedule 2; and

•

streamlining and adjusting roles and responsibilities between the Minister, ASIC and the RBA in Schedule 3.

Human rights implications

5.5 Consideration has been specifically given to the guidance in the Parliamentary Joint Committee on Human Rights' Guidance Note 2: Offence provisions, civil penalties and human rights and to the Attorney General's Department's Guide to Framing Commonwealth Offences, Infringement Notices and Enforcement Powers.

5.6 Schedule 1 to 3 to the Bill engage the following human rights:

•

the right to a fair trial under Articles 14 and 15 of the ICCPR

•

the imposition of strict liability in relation to some criminal offences;

•

the right against self-incrimination under article 14(3) of the International Covenant on Civil and Political Rights (ICCPR);

•

the right to work under Article 6(1) of the International Covenant on Economic, Social and Cultural Rights (ICESCR);

•

the right to protection from arbitrary or unlawful interference with privacy under article 17 of the ICCPR; and

•

the right to freedom of expression and to seek information under article 19(2) of the ICCPR.

Right to a fair trial

5.7 Article 14 establishes rights to due judicial process and procedural fairness. These rights apply in both civil and criminal proceedings, and in matters before both courts and tribunals.

5.8 Schedules 1 and 2 to the Bill engages these rights as they contain civil penalties and criminal offences for non-compliance, and include an evidential burden on a defendant.

Civil penalties

5.9 The civil penalty provisions in Schedules 1 to 3 may engage criminal process rights under Articles 14 and 15 of the ICCPR. Although there is a domestic law distinction between criminal and civil penalties, 'criminal' is separately defined in international human rights law. Therefore, when a provision imposes a civil penalty, it is necessary to determine whether or not the penalty amounts to a 'criminal' penalty for the purposes of Articles 14 and 15 of the ICCPR.

5.10 Schedules 1 and 2 introduce the following civil penalties:

•

failure to comply with a direction (sections 794AA and 840A of the Act)

•

failure to comply with conditions on a transfer determination or rules made for a transfer (sections 837E and 839K of the Act)

•

a director purports to perform or exercises a function whilst under statutory management (section 834A of the Act)

•

failure to comply with an financial infrastructure banning order under (subsection 853P(3) of the Act)

•

non-compliance with CS facility rules that are licensed in Australia (section 826J of the Act); and

•

failure to comply with a duty under an existing financial services law (section 853L of the Act).

5.11 The civil penalty provisions contained in Schedules 1 to 3 are not 'criminal' for the purposes of human rights law. While a criminal penalty is deterrent or punitive, these provisions are regulatory and disciplinary, and they aim to encourage compliance with Schedules 1 to 3. The provisions do not apply to the general public, but are limited to licensees in the financial market sector who should reasonably be aware of their obligations under the Act. Further, the imposition of these penalties are consistent with existing provisions in the Act and Banking Act 1959.

5.12 Further, the judiciary continues to have discretion to consider the seriousness of the contravention and impose a penalty that is appropriate in the circumstances. The civil courts are experienced in making civil penalty orders at appropriate levels having regard to the maximum penalty amount, taking into account a range of factors including the nature of the contravening conduct and the size of the organisation involved.

5.13 Finally, the civil penalties are for small amounts, with no sanction of imprisonment for non-payment of the penalty. Therefore, the imposition of these civil penalties is necessary and proportionate to the objective of preserving financial system stability in Australia and enables an effective disciplinary response to noncompliance.

Criminal penalties

5.14 Schedules 1 and 2 to the Bill includes criminal offences in relation to noncompliance with specific provisions. In particular, criminal offences are introduced for noncompliance with the following:

•

a request for information, access to documents or the facility, or a direction from the RBA or ASIC (sections 823H, 833E, 839H, 841A, 821D, 823BB, and 823BC of the Act)

•

failure of officers to take reasonable steps to ensure compliance (subsection 823W(1));

•

accounting for income or other distribution received after a transfer if the income or distribution arises from assets transferred to the receiving body under Part 7.3B of the Act (section 839G of the Act);

•

banning orders (section 853P of the Act);

•

disclosure of information covered by a secrecy determination (section 848A, 848B or 848C of the Act).

5.15 The strong deterrent effect of criminal sanctions is necessary for natural persons involved in regulating or operating FMI entities because of the direct link to the Australian financial system and the impact on the Australian economy. The criminal penalties introduced under Part 7.3B of the Act generally replicate existing offences under the Banking Act 1959. The criminal offences under Schedule 2 to the Bill generally follow existing similar provisions in the Act. Overall, the criminal penalties introduced are designed to enable the RBA and ASIC to maintain greater oversight of the Australian financial system and ultimately protect financial system stability in Australia

5.16 The offences are modelled on the standard for all Australian criminal laws, including default elements from the Criminal Code.

5.17 Consistent with Article 14(1) of the ICCPR, an independent, impartial court will preside over all criminal proceedings brought under Schedules 1 and 2 to the Bill, which will be subject to established Australian court processes and procedures that protect the right to a fair trial including requirements relating to procedural fairness, evidence and sentencing.

5.18 Given that these offences are appropriately designed to ensure integrity of Australia's financial system and will be administered in accordance with Australia's standards for criminal law proceedings, these offences are consistent with Article 14 of the ICCPR.

Offence of strict liability

5.19 Subsection 821K(2) of the Act introduces an offence of strict liability for a person considering appointing an external administrator of a body corporate who does not provide the RBA written notice prior to the appointment of an external administrator. Strict liability is appropriate in this circumstance, as it is necessary to strongly deter misconduct that can have serious detriment for Australia's financial system stability.

5.20 Strict liability reduces noncompliance, which bolsters the integrity of the regulation of FMI entities. Strict liability is appropriate where there is a need to ensure offences are dealt with expeditiously to maintain public confidence in the regulatory regime.

5.21 The strict liability in section 821K of the Act under Schedule 1 to the Bill meets all the requirements of the Guide to Framing Commonwealth Offences as:

•

the offence is not punishable by imprisonment;

•

the maximum penalty is at the maximum allowable for strict liability offences (60 penalty units for individuals or 300 penalty units for a body corporate); and

•

the harm to the overall financial stability is so significant that fault should not be an element of the offence.

5.22 The application of strict liability, as opposed to absolute liability, preserves the defence of honest and reasonable mistake of fact.

Evidential burden

5.23 Schedules 1 and 2 to the Bill engage Article 14(2) of the ICCPR because they impose an evidential burden on a defendant who wishes to raise a defence to offences for:

•

notification of recapitalisation or restructuring (section 821H);

•

complying with written approval from the statutory manager or the RBA when under statutory management (section 834A);

•

complying with the conditions set out in the transfer determination (section 837E);

•

disclosing information covered by a secrecy determination (sections 848C, and 848G);

•

implementing a direction made by ASIC or the RBA under Part 7.3 of the Act (section 823X);

•

things done, or omitted to be done, by RBA or RBA staff in good faith for the purposes of exercising, or purporting to exercise, powers conferred on them by Part 7.3B of the Act or section 823F of the Act (dealing with directions to preserve stability in the Australian financial system) (section 84A of the RB Act).

5.24 Placing an evidential burden in relation to those defences is appropriate, proportionate and reasonable. Principally, this is because in the vast majority of cases it will be peculiarly within the knowledge of the defendant how the information may have been publicly accessed, or the means by which the conduct was authorised by another law of the Commonwealth. This in turn is due to the wide range of publicly available information and circumstances in which other laws could authorise or require disclosure. Evidence establishing that disclosure was to a legal representative for the purpose of seeking legal advice or to another person as permitted by the other exceptions is also peculiarly within the defendant's knowledge and control.

5.25 Placing an evidentiary burden on the defendant is further justified because it would be significantly more difficult for the prosecution to disprove these matters than it would be for the defendant to establish these matters.

5.26 In summary, engaging the right to a fair trial in this way is necessary because it achieves the legitimate objective of ensuring that directions given by the Regulator (subject to a secrecy arrangement) are not disclosed in ways that may cause harm, and it ensures consistency of approach across relevant laws. Placing an evidentiary burden on the defendant therefore ensures that a secrecy offence is effectively prosecuted. Therefore, the provisions are consistent with the right to a fair trial under Article 14 of the ICCPR. The reversal of the burden of proof is appropriate in the circumstances as the public benefit of maintaining financial infrastructure outweighs the right to silence.

Merits review

5.27 Article 14 establishes rights to due judicial process and procedural fairness. These rights apply in both civil and criminal proceedings, and in matters before both courts and tribunals^[1]. Schedules 1 and 2 to the Bill exempts some decisions from merits review, only to the extent they are consistent with the Administrative Review Council's publication "What Decisions Should be Subject to Merits Review?^[2]".

5.28 All decisions under Part 7.3B of the Act are not subject to merits review, Decisions made under the crisis regime in Part 7.3B of the Act relates to financial decisions with a significant public interest, which is an allowable exemption from merits review This is justified on the basis that the RBA, ASIC and Ministers must act effectively and efficiently to protect financial system stability in Australia.

5.29 Decisions which are legislation-like in character, and decisions which are procedural or preliminary as they precede a substantive decision, are not suitable for administrative review. Likewise, other decisions are not reviewable where the benefits of not providing administrative review outweigh the objectives of providing it. This applies to decisions of ASIC and the RBA that apply to FMI entity licensees.

5.30 Therefore, Schedules 1 and 2 to the Bill upholds and does not unreasonably limit the right to a fair trial or fair hearing with respect to administrative decisions and judicial review.

Right to work

5.31 Sections 853H, 853K, 853L and 852M of Schedule 2 to the Bill engage the right to work under Article 6 of the ICESCR. The right to work provides that everyone must be able to freely accept or choose their work and includes a right not to be unfairly deprived of work. The right to work also requires that state parties provide a system of protection guaranteeing access to employment. This right must be made available in a non-discriminatory manner pursuant to Article 2(1) of the ICESCR.

5.32 The inclusion of a fit and proper test is appropriate as it pursues the legislative objective of ensuring that persons who have been approved as a licensee in financial markets within Australia are persons who are trustworthy and have the required integrity for the role. Ensuring that only individuals that meet appropriate ethical standards can be involved the licensing of FMI entities is necessary to protect the stability of Australia's financial system.

5.33 Participation in Australia's financial markets is not a right; participation is a privilege, granted by the Commonwealth to suitable persons. A person seeking the benefit of participation in an FMI entity will do so in the knowledge that ASIC may have regard to certain matters that broadly relate to noncompliance with certain financial market obligations or managing corporations. ASIC may also consider whether a person has had any criminal convictions within the past 10 years. These factors are aimed at ensuring a person is capable of operating an FMI entity.

5.34 The inclusion of a fit and proper standard with respect to FMI entities is appropriate and does not limit the Article 6 of the ICESCR, as it is necessary to protect Australia's financial system stability.

Information gathering and sharing

5.35 The RBA's new information-gathering powers engage the right against self-incrimination under Article 14(3)(g) of the ICCPR. Sections 823H, 833E and 841A of the Act empower the statutory manager and RBA to request critical information regarding the operation of domestic CS facilities. CS facility licensees are required to provide information relating to the business of the body corporate, its property or any affairs in its possession and to enable the statutory manager to inspect and take copies of the books. In a crisis, the body corporate may be required to give a statutory manager any information relating to the body corporate's business and other property affairs and financial circumstances, which may also be shared with the RBA.

5.36 The new information gathering provisions for the RBA may engage the right to protection from unlawful or arbitrary interference with privacy under Article 17 of the ICCPR as it may require the person to share personal information related to the CS licence facility. However, the information gathering powers are balances the RBA's need to access information with a natural person's right against self-incrimination by limiting the use of incriminating material supplied by the individual. Information obtained using the powers cannot be used against the individual in criminal proceedings or in proceedings where the person may be liable to a criminal penalty of 12 months.

5.37 The right in Article 17 may be subject to permissible limitations, where these limitations are authorised by law and are not arbitrary. In order for an interference with the right to privacy to be permissible, the interference must be authorised by law, be for a reason consistent with the ICCPR and be reasonable in the particular circumstances. The UN Human Rights Committee has interpreted the requirement of 'reasonableness' to imply that any interference with privacy must be proportional to the end sought and be necessary in the circumstances of any given case.

5.38 The amendments ensure the existing information sharing arrangements between ASIC and the RBA continues in a crisis under Part 7.3B of the Act. Due to the potential appointment of an external statutory manager, it is necessary the RBA and statutory manager are able to share confidential information. The amendment is reasonable as CS facilities are coregulated by both ASIC and the RBA with each regulator requiring effective and timely information to protect the integrity of Australia's financial system.

5.39 Any information that is shared between the RBA and ASIC or the RBA and the statutory manager will be 'protected information' within the meaning of each regulator's enabling legislation, and therefore, remain subject to strict confidentiality protections. ASIC, the RBA and an external statutory manager will be subject to the requirement to take all reasonable measures to protect confidential information from any unauthorised disclosure.

5.40 Schedule 1 to the Bill engages the right to freedom of expression and to seek information under article 19(2) of the ICCPR as a result of new secrecy provisions under Division 9 of Part 7.3B of the Act that enable certain persons to disclose protected information that would otherwise be subject to a secrecy determination.

5.41 The disclosure of protected information by way of a secrecy disclosure is proportionate to the objectives of resolving a crisis by protecting the stability of the financial system in Australia.

Conclusion

5.42 Schedules 1, 2 and 3 to the Bill are compatible with human rights as to the extent human rights issues are engaged, they are necessary and proportionate to the amendments.

Treasury Laws Amendment (Financial Market Infrastructure and Other Measures) Bill 2024

Overview

5.43 Schedule 4 to the Bill is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.

5.44 Climate change is recognised internationally as presenting material risks to the global financial system – risks which need to be managed by capital markets, regulators and corporations. These include physical risks of climate change and the transition risks associated with the market, regulatory and technological changes brought on by efforts to mitigate climate change.

5.45 Improving climate-related financial disclosures will support regulators to assess and manage systemic risks to the financial system as a result of climate change and efforts taken to mitigate its effects.

5.46 This Schedule requires entities that lodge financial reports under Chapter 2M of the Corporations Act, meet certain minimum size thresholds, and/or have emissions reporting obligations under the National Greenhouse and Energy Reporting (NGER) scheme, to make disclosures relating to climate in accordance with sustainability standards made by the Australian Accounting Standards Board (AASB). The amendments phase in the new obligations over a period of four years.

5.47 Climate disclosures will be subject to similar audit and reivew requirements to those currently in the Corporations Act for financial reports and will require entities to obtain a report from their financial auditor. The extent and level of assurance required will be set out in Australian auditing standards for sustainability reports, developed by the Auditing and Assurance Standards Board (AUASB).

5.48 These amendments ensure that relevant entities disclose their climate related plans, financial risks and opportunities, in accordance with sustainability standards made by the AASB. The new requirements build on the existing financial reporting framework through inclusion of a new 'sustainability report' that is required to be prepared for certain entities.

5.49 Businesses, investors, regulators and the public will have a clear and common understanding of obligations for entities to disclose climate-related financial risks and opportunities, in line with international standards.

Human rights implications

5.50 This Schedule new strict liability offences 88which may engage the right to a fair trial, as well as the presumption of innocence in Articles 14 and 15 of the International Covenant on Civil and Political Rights (ICCPR). Article 14(2) of the ICCPR recognises that all people have the right to be presumed innocent until proven guilty according to the law. Articles 14 and 15 apply only in relation to the rights of natural persons, not legal persons, such as companies.

Strict liability offences

5.51 Strict liability offences engage with the right to be presumed innocent as they involve the imposition of criminal liability without a mental fault element. However, strict liability offences are compatible with the presumption of innocence if they are reasonable, necessary and proportionate and in pursuit of a legitimate objective.

5.52 Several new strict liability offences are added to support the new auditing and assurance requirements in the new climate reporting regime. These include penalties for not complying with the strict requirements to conduct an audit in line with relevant climate standards, not retaining audit records as required or not providing the necessary declarations in relation to auditor independence requirements or adherence to codes of professional conduct. These strict liability offences mirror similar offences relating to financial recordkeeping.

5.53 A strict liability offence is also introduced for non-compliance with a direction by ASIC an entity to correct, complete or substantiate a statement made in a sustainability report (subsection 296E(8)).

5.54 The strict liability offences in this Schedule meet all the conditions listed in the Attorney-General's Department's A Guide to Framing Commonwealth Offences, Infringement Notices and Enforcement Powers. For example, the fines for the offences do not exceed 60 penalty units for persons other than a body corporate or 300 penalty units for a body corporate.

5.55 The application of strict liability, as opposed to absolute liability, preserves the defence of honest and reasonable mistake of fact to be proved by the accused on the balance of probabilities. This defence maintains adequate checks and balances for persons who may be accused of such offences.

5.56 Strict liability is appropriate in these circumstances, as it is necessary to strongly deter misconduct that can cause serious detriment to investors and regulators relying on statements made by entities and auditors' declarations. Having strict liability apply to these offences also reduces noncompliance by ensuring that regulators can efficiently and expeditiously deal with low-level offending. This in turn bolsters the integrity of the regulatory regime enforced by the Australian Securities and Investment Commission (ASIC) and maintains public confidence in the regime.

5.57 Given the importance of setting up the new climate-related financial disclosures scheme, this approach is a reasonable and proportionate means of achieving the legitimate objective of the new scheme.

Conclusion

5.58 To the extent that Schedule 4 to the Bill may engage the right to a fair trial, and presumption of innocence under Articles 14 and 15 of the ICCPR, it is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 as the limitations are appropriate, proportionate and achieve a legitimate objective to ensure the new scheme of climate-related financial disclosures operates effectively.

Attachment 1: Impact Analysis - Strengthening Australia's Financial Market Infrastructure regulatory framework

Financial Market Infrastructure Regulatory Reforms, 2020 Advice to Government from the Council of Financial Regulators

Executive Summary

Introduction

Financial market infrastructures (FMIs) are the key entities that enable, facilitate and support trading in Australia's capital markets. FMIs include financial market operators, benchmark administrators, clearing and settlement facilities and derivative trade repositories. The financial system's reliance upon FMIs, particularly central counterparties (CCPs), has increased significantly following the 2008 crisis as a result of reforms intended to reduce systemic risk. Today, FMIs in Australia support transactions in securities with a total annual value of $18 trillion and derivatives with a total annual notional value of $185 trillion. A disruption to the orderly provision of FMI services could cause a disruption to the wider financial system, which may have large economic costs.

FMIs face a wide variety of risks. The 2008 crisis illustrated the financial and counterparty risks to which financial institutions, including FMIs, are exposed, and the importance of sound risk management to address these risks. More recently, the operational disruption and market volatility associated with the economic fallout from the coronavirus disease (COVID-19) has highlighted the potential for an unforeseen event to impact the smooth functioning of FMIs. In the most extreme cases, these risks could threaten the viability of these critical infrastructures.

As the regulators of FMIs, the Australian Securities and Investments Commission (ASIC) and the Reserve Bank of Australia (RBA) (together, the Regulators) need strong and dependable powers to carry out their mandates and mitigate the risk of disruption to FMI services. The Regulators currently have a range of powers with respect to FMIs. However, the options available to the Regulators to address the potential insolvency of an FMI or other severe threats to its continued operation are very limited. The proposed reforms are also needed to improve the ability of the Regulators to manage such risks ahead of any potential crises, by enhancing the day- to-day regulatory regime and introducing powers to prepare for the orderly resolution of a clearing and settlement facility. In addition, the current distribution of regulatory powers does not always reflect the responsibilities of each Regulator, and the legislation provides a number of operational powers to the Minister (which are currently delegated to ASIC).

The Council of Financial Regulators (CFR) considers that the limitations of the current framework, combined with the current heightened global risk environment and the growing systemic importance of FMIs, means that reforms to existing powers – as well as some additional powers to manage the risks associated with FMIs and promote reliability and integrity of the markets that FMIs support – are required. This has been acknowledged in a number of independent reviews including the 2014 Financial System Inquiry and the International Monetary Fund's (IMF's) 2019 Financial System Assessment Program review.

Recommendations

This advice to Government sets out the CFR's case for reform and makes 16 recommendations for regulatory reform that are intended to:

•

introduce a resolution regime for licensed clearing and settlement facilities;

•

strengthen the Regulators' supervisory and enforcement powers in relation to FMIs; and

•

redistribute existing powers between ASIC, the RBA and the Minister to make the regulatory process more efficient and to better distinguish between operational and strategic functions.

The recommendations outlined in this advice were broadly supported by stakeholders in the recent public consultation (conducted between November 2019 and March 2020). In some cases, the recommendations have been refined to address the feedback provided during that consultation.

Should the Government proceed with the reforms, stakeholders will have the opportunity to engage further with the proposed reforms at a later stage in the process, once draft legislation to enact the reforms has been released publicly.

Financial Market Infrastructure Regulatory Reforms, 2019 Consultation Paper, Council of Financial Regulators

Executive Summary

The term financial market infrastructures (FMIs) refers to institutions that perform fundamental activities in financial markets. They include operators of financial markets, benchmark administrators, clearing and settlement facilities and derivatives trade repositories. FMIs are critical to the smooth and efficient functioning of the financial system. FMIs licensed in Australia support transactions in securities with a total annual value of $16 trillion and derivatives with a total annual value of $150 trillion. These markets turn over value equivalent to Australia's annual GDP every three business days. Securities and derivatives are used by investors and businesses in order to raise capital and finance, borrow and lend funds, invest in equities and debt securities and manage the risks associated with their activities. Investors rely on FMIs for access to transparent prices and a safe means of transacting in their investments, which include over $640 billion in superannuation assets held in Australian equities and fixed income assets. A disruption to the services provided by FMIs could have very severe consequences for the Australian financial system and to the investors and businesses that rely on FMIs.

International reforms following the 2008 financial crisis have increased both the role of FMIs in the financial system and the risks they face. Clearing and settlement facilities in particular are now critically important due to increased central clearing of over-the-counter (OTC) derivatives. OTC derivatives are widely utilised by financial institutions to manage their exposure to risk and there are now around $60 trillion (notional value) of Australian OTC derivative contracts outstanding, with a significant proportion of these centrally cleared.

This paper sets out the Council of Financial Regulator's (CFR's) proposed reforms to the regulation of FMIs. The reforms aim to ensure the effective regulation of the systems, services and facilities that underpin Australia's financial system.

The package includes changes to the licensing and supervision frameworks for financial market operators, benchmark administrators, clearing and settlement facilities and derivatives trade repositories, and a new crisis management regime for clearing and settlement facilities. These proposals aim to provide the Australian Securities and Investments Commission (ASIC) and the Reserve Bank of Australia (RBA) (the Regulators) with strong and effective powers to continue to fulfil their regulatory responsibilities.

The proposed reforms will address the recommendations of several reviews of Australia's financial system, which concluded that the current regulatory regime for FMIs should be enhanced to increase its effectiveness and align to international best practice. These reviews include the 2014 Financial System Inquiry, the 2019 International Monetary Fund (IMF) Financial Sector Assessment Program (FSAP) and previous work by the CFR. The reforms build on recent improvements to the regulation of authorised deposit-taking institutions (ADIs) and insurers and will help ensure the Australian economy is supported by a strong, well-functioning financial system.

This paper includes both new proposals and proposals that were the subject of previous consultation undertaken by the CFR. The CFR is primarily concerned with stakeholder feedback on new or changed reform proposals, but existing proposals are included in this paper to provide a complete picture of the proposed regulatory reform package.

Chapter 1 of this paper provides the rationale for reform and a brief overview of the current regulatory arrangements and the powers and functions of each of the Minister, ASIC and the RBA under the current legislation.

Chapter 2 outlines proposals designed to make sure the licensing regimes for relevant entities will be fit for purpose and effective into the future. The CFR proposes to change the roles of the Regulators so that operational licensing and related decisions sit with the Regulators and not the Minister. The Minister would retain powers in relation to strategic matters. This chapter also includes proposals to clarify when operators need to be licensed, and place additional responsibilities and obligations on licensees, reflecting their importance to the Australian financial system.

Chapter 3 outlines a number of proposals to enhance the supervisory powers of the Regulators. This includes enhancements to directions powers and information-gathering powers, a new rule-making power for ASIC, new arrangements in relation to changes in control of licensees, and the introduction of a fit and proper regime for key decision-makers.

Chapter 4 proposes the introduction of a resolution regime for clearing and settlement facilities, concentrating on modifications to proposals set out in an earlier consultation on this regime. Key proposals include expanding the scope of certain resolution powers to allow the resolution authority to take action in respect of related bodies corporate of a clearing and settlement facility licensee (CSFL) in resolution, and introducing resolution planning and resolvability powers. The CFR does not propose that the resolution regime will cover trade repositories at this time.

2014 Financial System Inquiry Report

Executive summary

This report responds to the objective in the Inquiry's Terms of Reference to best position Australia's financial system to meet Australia's evolving needs and support economic growth. It offers a blueprint for an efficient and resilient financial system over the next 10 to 20 years, characterised by the fair treatment of users.

The Inquiry has made 44 recommendations relating to the Australian financial system. These recommendations reflect the Inquiry's judgement and are based on evidence received by the Inquiry. The Inquiry's test has been one of public interest: the interests of individuals, businesses, the economy, taxpayers and Government.

Australia's financial system has performed well since the Wallis Inquiry and has many strong characteristics. It also has a number of weaknesses: taxation and regulatory settings distort the flow of funding to the real economy; it remains susceptible to financial shocks; superannuation is not delivering retirement incomes efficiently; unfair consumer outcomes remain prevalent; and policy settings do not focus on the benefits of competition and innovation. As a result, the system is prone to calls for more regulation.

To put these issues in context, the Overview first deals with the characteristics of Australia's economy. It then describes the characteristics of and prerequisites for a well-functioning financial system and the Inquiry's philosophy of financial regulation.

The Inquiry focuses on seven themes in this report (summarised in Guide to the Financial System Inquiry Final Report). The Overview deals with the general themes of funding the Australian economy and competition.

The Inquiry has also made recommendations on five specific themes, which comprise the next chapters of this report:

•

Strengthen the economy by making the financial system more resilient.

•

Lift the value of the superannuation system and retirement incomes.

•

Drive economic growth and productivity through settings that promote innovation.

•

Enhance confidence and trust by creating an environment in which financial firms treat customers fairly.

•

Enhance regulator independence and accountability, and minimise the need for future regulation.

These recommendations seek to improve efficiency, resilience and fair treatment in the Australian financial system, allowing it to achieve its potential in supporting economic growth and enhancing standards of living for current and future generations.

Guide to the Financial System Inquiry Final Report

Overview and general themes

The Inquiry has taken into account important features of Australia's economy. Australia has an open, market-based economy and is a net importer of capital. The Australian economy faces a considerable productivity challenge, and the Australian population, like many around the world, is ageing. Finally, Australia is in the midst of one of the most ubiquitous, generally applicable technology changes the world has ever seen.

Characteristics of an effective financial system

The financial sector plays a vital role in supporting a vibrant, growing economy that improves the standard of living for all Australians. The system's ultimate purpose is to facilitate sustainable growth in the economy by meeting the financial needs of its users. The Inquiry believes the financial system will achieve this goal if it operates in a manner that is:

•

Efficient: An efficient system allocates Australia's scarce financial and other resources for the greatest possible benefit to our economy, supporting growth, productivity and prosperity.

•

Resilient: The financial system should adjust to changing circumstances while continuing to provide its core economic functions, even during severe shocks. Institutions in distress should be resolvable with minimal costs to depositors, policy holders, taxpayers and the real economy.

•

Fair: Fair treatment occurs where participants act with integrity, honesty, transparency and non-discrimination. A market economy operates more effectively where participants enter into transactions with confidence they will be treated fairly.

Confidence and trust in the system are essential ingredients in building an efficient, resilient and fair financial system that facilitates economic growth and meets the financial needs of Australians. The Inquiry considers that all financial system participants have roles and responsibilities in engendering that confidence and trust.

The Inquiry's approach to financial system regulation

Central to the Inquiry's philosophy is the principle that the financial system should be subject and responsive to market forces, including competition.

However, competitive markets need to operate within a strong and effective legal and policy framework provided by Government. This includes predictable rule of law with strong property rights; a freely convertible floating currency and free flow of trade, investment and capital across borders; a strong fiscal position; a sound and independent monetary policy framework; and an effective, accountable and transparent government.

The Inquiry's approach to policy intervention is guided by the public interest. Given the inevitable trade-offs involved, deciding how and when policy makers should intervene in the financial system requires considerable judgement. Intervention should seek to balance efficiency, resilience and fairness in a way that builds participants' confidence and trust. Intervention should only occur where its benefits to the economy as a whole outweigh its costs, and should always seek to be proportionate and cost sensitive.

General themes

The Inquiry identified two general themes where there is significant scope to improve the functioning of the financial system:

1.

Funding the Australian economy.

2.

Competition.

Funding the Australian economy

The core function of the Australian financial system is to facilitate the funding of sustainable economic growth and enhance productivity in the Australian economy. The Inquiry believes Government's role in funding markets should generally be neutral regarding the channel, direction, source and size of the flow of funds.

The Inquiry identified a number of distortions that impede the efficient market allocation of financial resources, including taxation, information imbalances and unnecessary regulation. Reducing the distortionary effects of taxation should lead the system to allocate savings (including foreign savings) more efficiently and price risk more accurately. The Inquiry has referred the identified tax issues for consideration in the Tax White Paper.

A number of the Inquiry's recommendations aim to assist small and medium-sized enterprises in obtaining better access to funding. To strengthen Australia's ability to continue to access funding, both domestically and from offshore sources, recommendations have been made to improve the resilience of the Australian financial system. More broadly, given that Australia's growing superannuation system will have an increasing influence on future funding flows, the Inquiry believes that the recommendations it has made to improve the efficiency of the superannuation system would also enhance financial system funding efficiency.

Competition

Competition and competitive markets are at the heart of the Inquiry's philosophy for the financial system. The Inquiry sees them as the primary means of supporting the system's efficiency. Although the Inquiry considers competition is generally adequate, the high concentration and increasing vertical integration in some parts of the Australian financial system has the potential to limit the benefits of competition in the future and should be proactively monitored over time.

The Inquiry's approach to encouraging competition is to seek to remove impediments to its development. The Inquiry has made recommendations to amend the regulatory system, including: narrowing the differences in risk weights in mortgage lending; considering a competitive mechanism to allocate members to more efficient superannuation funds; and ensuring regulators are more sensitive to the effects of their decisions on competition, international competitiveness and the free flow of capital.

In particular, the state of competition in the financial system should be reviewed every three years, including assessing changes in barriers to international competition.

Recommendations relating to funding and competition are listed in Table 1.

Table 1: Funding the Australian economy and competition recommendations

Chapter 1: Resilience

Historically, Australia has maintained a strong and stable financial system supported by effective stability settings. However, the Australian financial system has characteristics that give rise to particular risks, including its high interconnectivity domestically and with the rest of the world, and its dependence on importing capital. More can be done to strengthen the resilience of Australia's financial system to avoid or limit the costs of future financial crises, which can deeply damage an economy and have lasting effects on people's lives.

As the banking sector is at the core of the Australian financial system, its safety is of paramount importance. Australia should aim to have financial institutions with the strength to not only withstand plausible shocks but to continue to provide critical economic functions, such as credit and payment services, in the face of these shocks. Adhering to international regulatory norms will help ensure Australian financial institutions and markets are not disadvantaged in raising funds in international financial markets.

The Inquiry's recommendations to improve resilience aim to:

•

Strengthen policy settings that lower the probability of failure, including setting Australian bank capital ratios such that they are unquestionably strong by being in the top quartile of internationally active banks.

•

Reduce the costs of failure, including by ensuring authorised deposit-taking institutions maintain sufficient loss absorbing and recapitalisation capacity to allow effective resolution with limited risk to taxpayer funds — in line with international practice.

These recommendations seek to ensure that Australia's financial system remains resilient into the future, and that it continues to provide its core economic functions, even in times of financial stress. These recommendations should also produce efficiency benefits, including through reducing implicit guarantees and volatility in the economy and promoting confidence and trust.

Chapter 2: Superannuation and retirement incomes

Australia's superannuation system is large by international standards and has grown rapidly since the Wallis Inquiry, primarily as a result of Government policy settings.

An efficient superannuation system is critical to help Australia meet the economic and fiscal challenges of an ageing population. The system has considerable strengths. It plays an important role in providing long-term funding for economic activity in Australia both directly and indirectly through funding financial institutions, and it contributed to the stability of the financial system and the economy during the global financial crisis.

However, the superannuation system is not operationally efficient due to a lack of strong price-based competition. Superannuation assets are not being efficiently converted into retirement incomes due to a lack of risk pooling and over-reliance on individual account-based pensions.

The Inquiry's recommendations to strengthen the superannuation system aim to:

•

Set a clear objective for the superannuation system to provide income in retirement.

•

Improve long-term net returns for members by introducing a formal competitive process to allocate new workforce entrants to high-performing superannuation funds, unless the Stronger Super reforms prove effective.

•

Meet the needs of retirees better by requiring superannuation trustees to pre-select a comprehensive income product in retirement for members to receive their benefits, unless members choose to take their benefits in another way.

These recommendations seek to improve the outcomes for superannuation fund members and help Australia to manage the challenges of an ageing population.

Chapter 3: Innovation

Technology-driven innovation is transforming the financial system, as evidenced by the emergence of new business models and products, and substantial investment in areas such as mobile banking, cloud computing and payment services.

Although innovation has the potential to deliver significant efficiency benefits and improve system outcomes, it also brings risks. Consumers, businesses and government can be adversely affected by new developments, which may also challenge regulatory frameworks and regulators' ability to respond.

The Inquiry believes the innovative potential of Australia's financial system and broader economy can be supported by taking action to ensure policy settings facilitate future innovation that benefits consumers, businesses and government.

The Inquiry's recommendations to facilitate innovation aim to:

•

Encourage industry and government to work together to identify innovation opportunities and emerging network benefits where government may need to facilitate industry coordination and action.

•

Strengthen Australia's digital identity framework through the development of a national strategy for a federated-style model of trusted digital identities.

•

Remove unnecessary regulatory impediments to innovation, particularly in the payments system and in fundraising for small businesses.

•

Enable the development of data-driven business models through holding a Productivity Commission Inquiry into the costs and benefits of increasing access to and improving the use of private and public sector data.

These recommendations will contribute to developing a dynamic, competitive, growth-oriented and forward-looking financial system for Australia.

Chapter 4: Consumer outcomes

Fundamental to fair treatment is the concept that financial products and services should perform in the way that consumers expect or are led to believe.

The current framework is not sufficient to deliver fair treatment to consumers. The most significant problems relate to shortcomings in disclosure and financial advice, which means some consumers are sold financial products that are not suited to their needs and circumstances. Although the regime should not be expected to prevent all consumer losses, self-regulatory and regulatory changes are needed to strengthen financial firms' accountability.

The Inquiry's recommendations to improve consumer outcomes aim to:

•

Improve the design and distribution of financial products through strengthening product issuer and distributor accountability, and through implementing a new temporary product intervention power for the Australian Securities and Investments Commission (ASIC).

•

Further align the interests of firms and consumers, and improve standards of financial advice, by lifting competency and increasing transparency regarding financial advice.

•

Empower consumers by encouraging industry to harness technology and develop more innovative and useful forms of disclosure.

These recommendations seek to strengthen the current framework to promote consumer trust in the system and fair treatment of consumers.

Chapter 5: Regulatory system

Australia needs strong, independent and accountable regulators to help maintain confidence and trust in the financial system, thereby attracting investment and supporting growth. This requires proactive regulators with the right skills, culture, powers and funding.

Australia's regulatory architecture does not need major change; however, the Inquiry has made recommendations to improve the current arrangements. Government currently lacks a regular process that allows it to assess the overall performance of financial regulators. Regulators' funding arrangements and enforcement tools have some significant weaknesses, particularly in the case of ASIC. In addition, it is not clear whether adequate consideration is currently given to competition and efficiency in designing and applying regulation.

The Inquiry's recommendations to refine Australia's regulatory system and keep it fit for purpose aim to:

•

Improve the accountability framework governing Australia's financial sector regulators by establishing a new Financial Regulator Assessment Board to review their performance annually.

•

Ensure Australia's regulators have the funding, skills and regulatory tools to deliver their mandates effectively.

•

Rebalance the regulatory focus towards competition by including an explicit requirement to consider competition in ASIC's mandate and conduct three-yearly external reviews of the state of competition.

•

Improve the process for implementing new financial regulations.

These recommendations seek to make Australia's financial regulators more effective, adaptable and accountable.

Appendix 1: Significant matters

In addition to the recommendations in the above areas, the Inquiry has made 13 recommendations relating to other significant matters. These are contained in Appendix 1: Significant matters.

Appendix 2: Tax summary

A number of tax observations are included in Appendix 2: Tax summary for consideration by the Tax White Paper.

Recommendations

The Inquiry has made 44 recommendations relating to the Australian financial system. The nature of some recommendations warrants more in-depth discussion. These recommendations are shaded darker in the Summary of recommendations by chapter tables on the following pages. The Inquiry considers that the remaining recommendations in the body of the report can be made without providing the reader with the same depth of explanation. Recommendations contained in Appendix 1: Significant matters are only explained briefly.

Summary of recommendations by chapter

Crisis management toolkit

Recommendation 5

Complete the existing processes for strengthening crisis management powers that have been on hold pending the outcome of the Inquiry.

Description

In September 2012, the previous Government consulted on a comprehensive package, Strengthening APRA's crisis management powers.⁶³ The CFR has also recommended separate changes to resolution arrangements and powers for FMI.⁶⁴ In 2013, these processes were put on hold as part of a Government moratorium on significant new financial sector regulation pending the outcome of this Inquiry. Government should now resume these processes, with a view to ensuring regulators have comprehensive powers to manage crises and minimising negative spill-overs to the financial system, the broader economy and taxpayers.

The Inquiry strongly supports enhancing crisis management toolkits for regulators. It is important for the two processes to be concluded, giving due consideration to industry views on the packages.

Objectives

•

Promote a resilient financial system.

•

Enable the orderly resolution of distressed financial institutions.

Discussion

Problems the recommendation seeks to address

Given the importance of ADIs, insurers, superannuation funds and FMI to the functioning and stability of the financial system and economy, regulators need comprehensive powers to facilitate the orderly resolution of these institutions.

Responding to local and global changes, CFR agencies reviewed the existing legislative provisions for prudentially regulated institutions and FMI. These reviews paid close attention to international standards and developments, particularly G20 and FSB initiatives to promote resilient financial systems and frameworks that resolve financial distress, including the FSB Key Attributes of Effective Resolution Regimes for Financial Institutions (Key Attributes).⁶⁵ Although Australia has strong frameworks, the reviews identified gaps and areas that could be strengthened.

The Government consultation paper Strengthening APRA's crisis management powers canvassed a number of options in relation to all APRA-regulated industries. The package does not include statutory bail-in powers outlined in the Key Attributes or general structural requirements, such as ring-fencing, being pursued in some jurisdictions. It includes:

•

Directions powers, including clarifying that APRA may direct a regulated institution to pre-position for resolution — that is, require changes at an institution to make it more feasible to successfully resolve that institution if it were to fail.

•

Group resolution powers, including extending certain powers to authorised non-operating holding companies (NOHCs) and subsidiaries in a range of distress situations.

•

Powers to assist with resolving branches of foreign banks.

The CFR recommendations for strengthening the crisis management framework for FMI included:

•

Introducing a specialised resolution regime for FMI.

•

Clarifying the application of location requirements for FMI operating across borders.

Since these processes were put on hold, international developments have included updates to the Key Attributes, yielding additional guidance on areas such as

cross-border information sharing, and resolving FMI and FMI participants. Some countries have also introduced structural reforms, such as mandating a form of ring-fencing, or a NOHC structure for institutions with certain risk profiles or of a certain size, with the aim of improving resolvability. These approaches emphasise reducing risks to core banking activities from more complicated and risky forms of banking, and simplifying institutions to make them more easily resolved.

Conclusion

The Inquiry believes progressing the packages would deliver a substantial net benefit. A range of resolution options — more 'tools in the toolkit' — would maximise the likelihood that a viable option will be available in any given situation to achieve an orderly resolution. The Inquiry notes the high costs associated with the disorderly failure of an institution, particularly where this creates financial system instability or the need for Government support. The Inquiry also notes that many of the proposed powers would have a limited regulatory burden in normal times.

In relation to the package of resolution powers for APRA, industry submissions largely support the package, although they raise practical and legal issues with some of the proposals.⁶⁶

APRA's submission to the Inquiry stresses the vital role that crisis management powers play in the prudential framework.⁶⁷ In any future crisis, these reforms would provide a wider range of tools, making it more likely that a credible, low-cost option for preventing a disorderly failure could be found, without risking taxpayer funds.

The RBA advocates for progressing the CFR proposals on FMI regulation as a matter of priority.⁶⁸ It notes that the continuity of FMI services is critical for the financial system to function. In addition, the RBA notes that, where FMI is domiciled offshore, Australian regulators need to have sufficient influence to prevent Australian functions from being compromised in a resolution.

The Inquiry does not recommend pursuing industry-wide structural reforms such as ring-fencing. These measures can have high costs, and require changes for all institutions regardless of the institution-specific risks. Neither APRA nor the RBA nor the banking industry saw a strong case for these reforms.

Nevertheless, APRA submits that it may be beneficial to require structural changes for specific institutions in some situations, where substantial risks or significant organisational complexity may impede supervision or an orderly resolution. The powers included in the consultation package provide sufficient flexibility to do this effectively.

Given the time that has passed since the initial consultation in progressing the reform packages — in particular, the considerable international developments over this period — a view should be taken as to whether additional proposals warrant inclusion.

All proposals should go through the appropriate consultation, regulatory assessment and compliance cost assessment processes.

⁶³ Treasury 2012, Strengthening APRA's Crisis Management Powers: Consultation Paper, Commonwealth of Australia, Canberra.

⁶⁴ Stevens, G 2012, 'Review of Financial Market Infrastructure Regulation', letter to The Hon. Wayne Swan, MP, Deputy Prime Minister and Treasurer, 10 February

⁶⁵ Financial Stability Board (FSB) 2014, Key Attributes of Effective Resolution Regimes for Financial Institutions, FSB, Basel.

⁶⁶ Submissions on the consultation paper are available on the Treasury website, viewed 11 November 2014,

http://www.treasury.gov.au/ConsultationsandReviews/Consultations/2012/APRA/ Submissions.

⁶⁷ Australian Prudential Regulation Authority 2014, Second round submission to the Financial System Inquiry, page 38.

⁶⁸ Reserve Bank of Australia 2014, First round submission to the Financial System Inquiry, page 4.

IMF Financial Sector Assessment Program, 2019 Financial System Stability Assessment (Australia)

EXECUTIVE SUMMARY

The Australian authorities have taken welcome steps to further strengthen the financial system since the previous FSAP. Bank capital requirements have been raised and applied more conservatively than minimum Basel standards. Funding risks have been lowered. Financial supervision and systemic risk oversight have been enhanced. And the authorities have taken successful policy action to calm rapid growth in riskier segments of the mortgage market.

The system nonetheless faces challenges. Stretched real estate valuations and high household leverage pose significant macrofinancial risks. 27 years of uninterrupted growth, low inflation, low policy rates, tax incentives, and easy credit have stimulated a rise in household debt and fueled a build-up of real estate exposure in a concentrated banking system, which together with pension ('superannuation") funds dominates the large Australian financial sector. Household debt has risen by some 25 percentage points since the previous FSAP to about 190 percent of disposable income, one of the highest levels in the world. Banks continue to draw extensively on overseas wholesale funding, though reliance has declined in recent years. The ongoing Royal Commission (RC) inquiry has revealed a pattern of misconduct in the financial sector, including at the four major banks that comprise 80 percent of the system.

The major banks run similar business models, raising the vulnerability of the system to a common shock. All are heavily exposed to real estate—residential forming about 60 percent of loans, and commercial (CRE) a further 7 percentage points. Wholesale funding dependence has diminished but remains around one-third of total funding, of which nearly two-thirds is from international sources. Banks' direct international exposures are mainly to New Zealand, where subsidiaries of the four major Australian banks play a dominant role in the banking system.

Bank solvency appears relatively resilient to stress. A test of resilience to a combination of a significant slowdown in China, a severe correction in real estate valuations, and a marked tightening of global financial conditions, revealed some pressures on capital, although the 10 largest banks would all still meet regulatory minima. Liquidity pressures may arise more abruptly. Given high maturity transformation, banks' continued reliance on overseas wholesale funding leaves them exposed to global liquidity shocks.

Policy action has lowered financial stability risks. Restrictions on the growth of investor loans and the share of interest-only mortgages, as well as the introduction of stronger lending standards, appear to have led to a slowdown in mortgage credit growth, and the housing market is now cooling. Given this background, additional tightening measures do not appear warranted at this juncture, though, given prevailing vulnerabilities, the authorities should stand ready to recalibrate policies as necessary to continue to reduce systemic risk. Over time, broader tax reforms could reduce structural incentives for leveraged investment by households, including in residential real estate. Further reduction in banks' use of wholesale funding and extension of the duration of their liabilities would help to lower structural funding risks.

Australia benefits from a robust regulatory framework. Financial supervision shows generally high conformity to international best practices, although there are opportunities to close identified gaps and strengthen arrangements. Steps are recommended to bolster the independence and resourcing of the regulatory agencies, by removing constraints on their policy making powers and providing additional budgetary autonomy and flexibility.

Enforcement powers should be strengthened, and their use expanded, to support effective risk management and mitigate future misconduct. Supervisory approaches would also be enhanced by periodic in-depth reviews of banks' governance and risk management, and by improving coordination of supervision of internationally active insurance groups.

Greater formalization and transparency of the work of the Council of Financial Regulators (CFR) would further buttress the financial stability framework. While the authorities have a strong track record of addressing financial stability issues in a productive and collaborative manner, the current arrangements are informal, and there is limited transparency surrounding the work of the Council. Greater formalization could further strengthen collaboration, boost confidence in the collective work of the regulatory agencies, and guard against possible delay in addressing nascent systemic risks. The CFR is encouraged to boost transparency by publishing records of its meetings and tabling an Annual report to Parliament, highlighting the identification of systemic risks and actions taken to mitigate them.

Additional investment in data and analytical tools would strengthen financial supervision and systemic risk oversight. Relative to international experience, the assessment identified shortfalls in the granularity and consistency of data to support the analysis of supervisory and systemic risks and the formulation of policy. The CFR agencies are recommended to conduct a major review of potential data needs and implement improvements, publishing the resulting data where feasible.

Improved data would also facilitate enhancements in stress testing and support closer integration of the results into prudential supervision, crisis preparedness and policy discussions. It would also help harness the collective expertise of the Reserve Bank (RBA) and the Australia Prudential Regulation Authority (APRA) in the analysis and evaluation of policy options.

Expansion of the set of policy tools would enhance flexibility to address systemic risk and structural vulnerabilities. A 'readiness' assessment of potential policy options would enable the authorities to address the associated data requirements and tackle any legal or regulatory obstacles to their use. Priorities for review include DTI/DSTI and LTV restrictions, time-varying risk weights, as well as tools to address risks from nonbanks and from highly cyclical assets such as CRE.

Reinforcing financial crisis management arrangements is a priority. Encouraging progress has been made in strengthening APRA's resolution powers and expanding banks' recovery planning to cover additional institutions. Building on this progress, there is scope for better integration of banks' recovery planning into their risk management framework. It is also important to complete the resolution policy framework quickly, to ensure that banks expand their loss absorbency capacity to bear the costs of their own failure. Bank-specific resolution plans should be rolled out and validated swiftly. The Australian and New Zealand authorities have developed a strong and effective supervisory relationship, but there is a need to advance mutual understanding of approaches to resolution in order to establish clear cross-border bank resolution modalities. Some progress has also been made in developing a resolution framework for Financial Market Infrastructures (FMIs) and its finalization is a priority.

40. While AUSTRAC has the authority to oversee banks' AML/CFT systems, its significant reliance on banks' self-reporting of weaknesses has not always proved effective. Recent events have shown that some banks' processes for ensuring compliance with AML/CFT requirements have not worked as reported, which have resulted in failure to comply with rules and laws. AUSTRAC should enhance its supervisory approach by performing end-to-end periodic thematic reviews of AML/CFT systems particularly for major banks and should take swift formal action to address weaknesses and critical compliance issues.

E. Financial Market Infrastructures³²

41. Financial Market Infrastructures (FMIs) in Australia generally operate reliably, and the competitive landscape has seen new entrants and competitors emerge. The Reserve Bank Information and Transfer System (RITS), operated by the RBA, is the only domestic systemically important interbank payment system. In addition, the domestically incorporated Australian Securities Exchange (ASX) group operates an integrated infrastructure including trading platforms, two central counterparties (CCPs) and two securities settlement systems (SSSs) (Figure 11). Since 2011, the ASX has faced competition from foreign infrastructures in some markets, including Chi-X for cash equities trading and the London Clearing House Limited (LCH Ltd) and the Chicago Mercantile Exchange (CME) for some over the counter (OTC) derivatives clearing.

42. FMIs are subject to strong supervisory oversight though enforcement powers should be strengthened further. Supervisory oversight of FMIs by the RBA and ASIC is well-established, with supervisory expectations importantly strengthened over the past few years. Legal and regulatory frameworks for FMIs are generally clear and transparent; and regulatory requirements sufficiently detailed due to the adoption of the PFMI and subsequent guidance. The FSAP recommends that the authorities strengthen enforcement powers for the supervision of CCPs and SSSs to promote compliance with regulatory requirements and to take corrective actions in accordance with the PFMI, as well as to promote effective competition between FMIs (given that one entity operates several systemic FMIs). Steps should also be taken to further enhance already close cooperation between domestic and foreign authorities in case of a crisis event affecting FMIs.

43. Further attention is warranted to strengthen ASX Clear's governance and risk management framework to promote compliance with the authorities' guidelines. ASX Ltd and the authorities are encouraged to consider the impact of the current governance structure on compliance with risk management requirements. Additional improvements to risk management systems should be considered to facilitate separation of house and client accounts, implementation of concentration limits on collateral, holding of adequate pre-funded liquid resources and improvements in the operation of intraday margin calls. Operational risks should also be further addressed.

44. The authorities should prioritize finalization of the special resolution regime for FMIs. Some progress has already been made. The CFR authorities are in the process of drafting legislation that establishes a resolution regime for FMIs consistent with international standards and that incorporates feedback from stakeholders on a past consultation paper.³³ To finalize the regime, the authorities will need to address issues specific to Australia's financial market structure, such as clearing and settlement facilities that are part of a vertically-integrated exchange group, the dominance of a few domestic financial institutions and a few global banks, and issues regarding the diversity and capacity of private liquidity providers.

³³ See "Resolution Regime for Financial Market Infrastructures," Treasury, February 2015, and "Resolution Regime for Financial Market Infrastructures: Response to Consultation," CFR, November 2015.

³⁴ Australia was assessed jointly by the Financial Action Task Force (FATF) and the Asia-Pacific Group on Money Laundering. The mutual evaluation report (MER) was adopted on February 27, 2015 and published on April 21, 2015, see
http://www.fatf-gafi.org/countries/a-c/australia/documents/mer-australia-2015.html.

³⁵ FATF has upgraded Australia's ratings on seven Recommendations, see
http://www.fatf- gafi.org/media/fatf/documents/reports/fur/FUR-Australia-2018.pdf. Australia remains in the FATF's enhanced follow-up process because 14 Recommendations remain non- or partially- compliant, including several related to priority improvements identified in the MER.

³⁶ Financial intelligence is analysis derived from reports submitted to FIUs and from other information sources, aimed at assisting criminal investigations into money laundering, its underlying offences or terrorist financing by: identifying the extent of criminal networks and/or the scale of criminality; identifying and tracing the proceeds of crime, terrorist funds or any other assets that are, or may become, subject to confiscation; and developing evidence, which could be used in criminal proceedings.

IMF Financial Sector Assessment Program, 2019 Technical Note – Supervision, Oversight and Resolution Planning on Financial Market Infrastructures

EXECUTIVE SUMMARY

Financial Market Infrastructures (FMIs) in Australia generally operate reliably, and the competitive landscape has seen new entrants and competitors emerge. The Reserve Bank Information and Transfer System (RITS), operated by the Reserve Bank of Australia (RBA), is the only domestic systemically important interbank payment system. In addition, the domestically incorporated ASX Limited (ASX) group operates an integrated infrastructure including trading platforms, two central counterparties (CCPs), and two securities settlement systems (SSSs). Since 2011, the ASX has faced competition from foreign infrastructures in some markets, including Chi-X Australia Pty Ltd (Chi-X) for cash equities trading and the LCH Limited (LCH Ltd) and the Chicago Mercantile Exchange (CME) for some over the counter (OTC) derivatives clearing.

Supervision and oversight of FMIs is well-established with supervisory expectations importantly strengthened over the past few years. The Australian authorities responsible for the regulation, supervision, and oversight of FMIs are the RBA and the Australian Securities and Investments Commission (ASIC). The RBA has sole responsibility for payment systems, while ASIC and the RBA have complementary regulatory responsibilities for CCPs and SSSs. The FSAP assessment is that Clearing and Settlement (CS) facility² supervision and oversight are strong and that the FMI legal and regulatory framework generally is clear and transparent. The adoption of the CPSS-IOSCO Principles for Financial Market Infrastructures (PFMI) and subsequent guidance has strengthened the authorities' approach with more comprehensive requirements and assessments, as well as increased diligence in following up on findings. Cooperation among the authorities is close, both domestically as well as with foreign authorities, although cooperation frameworks need to be further developed to manage FMI crisis events. The mission recommends the RBA consider updating its approach to payment systems oversight, in particular to increase the transparency around expectations for potential (privately operated) systemically important payment systems.

Enforcement powers for the supervision of CCPs and SSSs should, however, be strengthened in accordance with the PFMI. Currently, the RBA has no independent enforcement powers to underpin its oversight. The RBA may request that ASIC issue a direction to comply with the FSS or to reduce systemic risk; however, ASIC is not required to do so. Furthermore, the Minister may overrule ASIC's decision regarding whether to make or to revoke a direction. Although there is no evidence of such intervention by the Minister (and, in fact the Minister has delegated certain responsibilities to ASIC), the current legal basis for enforcing corrective actions should be strengthened with independent powers for the RBA. It also is recommended that legislation should grant ASIC and the ACCC the powers to promote fair and effective competition between FMIs, as such powers are lacking. Supervisory powers could be broadened, for example, by granting rule writing powers in addition to directions powers.

The Australian authorities have made some progress in formulating a special resolution regime for FMIs. In 2015, the Australian government issued a high-level consultation paper to establish a special resolution regime for CS facilities (and trade repositories) consistent with international standards. It requested feedback on the scope of the resolution authority, resolution and directions powers, safeguards and funding arrangements, and international cooperation. The CFR authorities are developing drafting instructions for legislation that would establish a resolution regime for FMIs.

² CCPs and SSSs jointly are called Clearing and Settlement (CS) facilities under the Australian Corporations Act 2001.

The government should prioritize finalization of its special resolution regime for domestic FMIs, since it currently lacks the necessary framework and tools to resolve an FMI. The authorities will need to address issues specific to Australia's financial market structure, such as CS facilities that are part of a vertically-integrated exchange group, the dominance of a few domestic financial institutions and a few global banks in the Australian financial market, and issues regarding the diversity and capacity of private-sector liquidity providers. This specific structure will have an important bearing on the decisions that the Australian government will have to make regarding the breadth of the authorities' powers. Important considerations include the treatment of affiliated entities within groups, including the implications for the point-of-entry strategy, and the breadth of ex-ante resolvability assessments and FMI resolution plans.

New supervisory challenges, in particular related to cyber risks and new technologies, are appropriately addressed by ASIC and the RBA; nevertheless, cyber resilience of FMIs would further benefit from industry-wide cyber tests. RITS and ASX's CS facilities are subject to regular cyber resilience assessments by the authorities against CPMI-IOSCO guidance, international standards, and good practices. Authorities could supplement these with industry-wide cyber resilience tests to gain insights into the impact of a cyber incident on the industry as a whole. With regard to distributed ledger technology (DLT) and other new technologies, ASIC's and RBA's approach includes monitoring developments and specifying expectations. Supervision of the replacement of ASX's CS systems, which uses DLT technology, can be fully addressed within the existing regulatory framework. It involves a permissioned model, where only ASX, clearing members, and issuers would be authorized to participate. Private contractual information would be available only to the transaction parties, and ASX would be the only permissioned writer to the ledger.

The FSAP's assessment of elements of ASX Clear's governance and risk management framework identified several areas where further attention is warranted. ASX Ltd and the authorities are encouraged to consider the impact of the current governance structure on compliance with CS risk management requirements, including whether a simpler structure would help meet requirements related to competition issues in the equity market more easily. The planned FMI resolution regime will also have to address the integrated functions and any resulting obstacles to the FMI's resolvability. ASX Clear's recovery plan should address its reliance on parent funding and on other group services. Further improvements to its risk management systems should be considered, such as the operational capacity to implement intraday margin calls, separate house and client accounts, implementation of concentration limits on collateral, and availability of sufficient pre-funded liquid resources before applying mechanical liquidity allocation mechanisms. Operational risks need to be further addressed in line with authorities' requirements.

Overseas Clearing and Settlement Facilities: The Australian Licensing Regime, 2015 Consultation Paper, Council of Financial Regulators

Introduction

The increasingly global nature of many financial markets, combined with regulatory reforms, has prompted increased participation by domestic financial institutions in overseas clearing and settlement (CS) facilities. A number of overseas CS facilities have also recently begun, or expressed interest in, providing CS services that may be relevant to the safe, efficient and effective functioning of the Australian financial system, or confident, fair and effective dealings in financial products by Australian CS facility users.

Alongside these developments, the Australian Securities and Investments Commission (ASIC) and the Reserve Bank of Australia (RBA) are receiving an increasing number of queries regarding whether certain overseas CS facilities fall within the scope of the licensing regime under Part 7.3 of the Corporations Act 2001 (Corporations Act). These queries have arisen primarily due to a lack of clarity around whether, for the purposes of the Corporations Act, an overseas CS facility is 'operating in this jurisdiction'. This is the threshold that determines whether a CS facility must be either licensed or exempted from Part 7.3 of the Corporations Act.

The Council of Financial Regulators (CFR) considers that there is a case to provide greater clarity, to the extent practicable, regarding the circumstances in which a CS facility must be either licensed in Australia or exempted from Part 7.3 of the Corporations Act. While ASIC has issued guidance that sets out a number of non-exhaustive factors that it would consider in assessing whether a CS facility is operating in this jurisdiction,¹ greater clarity in legislation and accompanying regulation would provide increased legal certainty for overseas CS facilities and their participants.

This consultation seeks preliminary views on legislative change as part of the CFR's ongoing consideration of the cross-border regulation of CS facilities. Any legislative change will ultimately be a matter for the government to consider.

This paper proposes a new approach to assessing whether an 'overseas' CS facility (i.e. a CS facility that is not operated by a body corporate registered under Chapter 2A of the Corporations Act) must be either licensed in Australia or exempted from Part 7.3 of the Corporations Act. The proposal rests on a test of the materiality of the CS facility's connection to the Australian financial system. ASIC, in consultation with the RBA, will make a determination about whether a CS facility's activities are material for the purposes of this test. The purpose of this proposal is to promote Australian entities' access to a diverse range of CS options, both in Australia and overseas, by providing clarity to all stakeholders on the scope of the Australian CS facility licensing regime.

It is not expected that the proposed new approach would result in additional CS facilities being within the scope of Australia's CS facility licensing regime, and the rest of the Australian CS facility licensing regime would remain unchanged. The factors relevant to a consideration of the materiality of a CS facility's connection to the Australian financial system by ASIC and the RBA (together, the regulators) are already listed in ASIC's Regulatory Guide 211 – Clearing and Settlement Facilities: Australian and Overseas Operators (RG 211). Rather, the proposed new approach formalises how these factors are currently, and in the future will be, weighed in reaching judgements around regulatory scope so as to provide clarity and transparency for prospective future CS facility licence applicants.

¹ See ASIC (2012), Regulatory Guide 211 – Clearing and Settlement Facilities: Australian and Overseas Operators, December. Available at
http://asic.gov.au/regulatory-resources/find-a-document/regulatory-guides/rg-211-clearing-and-settlement- facilities-australian-and-overseas-operators/.

Background

CS facilities are regulated in Australia under the Corporations Act in order to maintain financial system stability, reduce systemic risk and ensure CS services are provided in a fair and effective way. These objectives are the basis for the scope of the Australian CS facility licensing regime.

The Corporations Act currently provides that a CS facility must only be operated in this jurisdiction (i.e. operated in Australia) if its operator holds an Australian CS facility licence or the facility is exempt from Part 7.3 of the Corporations Act. While section 820D of the Corporations Act provides that a CS facility is taken to be operating in this jurisdiction if it is operated by a body corporate registered under Chapter 2A of the Corporations Act, it does not limit the circumstances in which a CS facility is operated in this jurisdiction. ASIC's RG 211 sets out a number of non-exhaustive factors that it would consider when assessing whether a CS facility operates in this jurisdiction. These factors are:

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the location of the CS facility's technical infrastructure

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whether the CS facility has one or more Australian users or participants

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the volume and value of transactions submitted to the CS facility by Australian users or participants

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the nature of the transactions and financial products made available, for example whether these products are denominated in Australian dollars

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whether the CS facility has entered into an arrangement with a financial market operating in Australia to provide CS services to that market.

If a CS facility is operating in this jurisdiction, its operator must apply to the Minister, through ASIC, for an Australian CS facility licence or an exemption from Part 7.3 of the Corporations Act (see Figure 1). The Corporations Act provides for two classes of Australian CS facility licence: a 'domestic' licence, granted under section 842B(1); and an 'overseas' licence, granted under section 824B(2).² The Minister may grant an overseas licence to a CS facility operator if the requirements of section 824B(2) are met, including that the operator is authorised to operate the CS facility in the foreign country in which the principal place of business is located, and the regulatory regime in that country is sufficiently equivalent to that in Australia.

An operator can also apply to the Minister for an exemption from the requirement to hold an Australian CS facility licence (i.e. an exemption from Part 7.3 of the Corporations Act). ASIC will recommend an exemption when it is satisfied that there is no policy reason for regulating the operator of a CS facility in this jurisdiction as a licensee. ASIC will normally only advise the Minister to exempt a particular CS facility if:

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the regulatory outcomes for CS facilities are not relevant to its CS facility

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the regulatory outcomes for CS facilities are achieved without regulation under Part 7.3

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the cost of the regulation required to achieve the regulatory outcomes for CS facilities significantly outweighs the benefits of those outcomes.

² The two separate classes of Australian CS facility licence ensures the appropriate regulatory influence is accorded to CS facilities operating in this jurisdiction. For example, a systemically important CS facility with a strong domestic connection would be required to incorporate locally and hold a domestic licence, such that ASIC and the RBA would be the primary regulators. Further consideration was given to this matter in the Australian Government's February 2015 consultation paper 'Resolution Regime for Financial Market Infrastructures', available at
http:// www.treasury.gov.au/ConsultationsandReviews/Consultations/2015/Resolution-regime-for-financial-market-infrastructures.

2. Proposed Amendments

The policy intention behind Australia's CS facility licensing regime is to capture facilities with operations that have, or are expected to have, implications for the safe, efficient and effective functioning of the Australian financial system or the confident, fair and effective dealings in financial products by Australian investors; that is, to capture facilities that have a material domestic connection. It is proposed that the existing concept of operating in this jurisdiction be replaced by the concept of a material domestic connection for overseas CS facilities.

It is proposed that:

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a body corporate that is registered under Chapter 2A of the Corporations Act must only operate, or hold out that it operates, a CS facility if the body corporate has an Australian CS facility licence, or the facility is exempt from the operation of Part 7.3³

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a CS facility operator, other than a body corporate registered under Chapter 2A, must only operate, or hold out that it operates, a CS facility that has a material domestic connection to Australia if the CS facility operator has an Australian CS facility licence, or the facility is exempt from the operation of Part 7.3.

The test would include two components, both of which must be met for the requirement for an overseas CS facility to be either licensed or exempted from the operation of Part 7.3 of the Act (see Figure 2).

³ This has the same effect as section 820D of the Corporations Act; however, it is not linked to the concept of 'operating in this jurisdiction'.

First Component: A CS Facility's Domestic Connection

The first component of the test – a CS facility's domestic connection – would establish objectively if the operations of a CS facility were in any way connected to the Australian financial system. It is intended that this component provide a high degree of certainty for all stakeholders as to when a CS facility was out of the scope of the Australian CS facility licensing regime. The factors that would constitute a domestic connection include: the location of a CS facility's operations in Australia; the provision of CS services for financial products connected with Australia; the provision of CS services to one or more Australian participants; or having arrangements with the operator of a domestically licensed or exempted financial market or CS facility. These factors are set out in Section 5 of this paper.

This component of the test aims to ensure that CS facilities relevant to the functioning of the Australian financial system are identified as potentially within the scope of the Australian CS facility licensing regime. The materiality of these facilities' domestic connection would then be assessed under the second component of the test (described below), to establish whether they should indeed be subject to licensing (or exemption from the regime).

In defining a domestic connection for the purposes of this component of the test, the CFR has aimed to strike a balance between public policy relevance and appropriate cross-border reach. That is, the CFR has sought to ensure that the potential scope of the regime is neither too broad nor too narrow. For example, a connection that arose solely from Australian users' indirect participation in an overseas CS facility in relation to activities in non-Australian-related products would not fall within the proposed definition, on the basis that too large a number of overseas CS facilities would then potentially be within the scope of the regime. In striking this balance, the CFR has taken into account that non-participant users would be likely to be accorded the appropriate protections via the implementation of the CPMI-IOSCO Principles for Financial Market Infrastructures by the CS facility's primary regulator(s). For example, Principle 14 relating to the segregation and portability of positions of a participant's customers and the collateral provided to the CS facility with respect to those positions.

The CFR also acknowledges that this component of the test should balance the need to provide regulatory certainty for all stakeholders with the need for flexibility to account for future changes in the nature of the provision of CS services – for example, through evolution in the participation models offered by CS facilities. For this reason the CFR is seeking feedback on whether the factors constituting a domestic connection are appropriate to accommodate such future changes and whether any other factors should be considered.

A CS facility that had a domestic connection would be required to notify ASIC and the RBA.

Second Component: Materiality of a CS Facility's Domestic Connection

Where the first component of the test established whether an overseas CS facility had a domestic connection, the second component would assess the materiality of that connection. A CS facility's connection to the Australian financial system would be material if ASIC, in consultation with the RBA, is satisfied that the facility's current or expected activities were material to the safe, efficient and effective functioning of the Australian financial system or the confident, fair and effective dealings in financial products by Australian investors.

To provide further clarity to stakeholders, the circumstances in which the materiality component of the test is likely to be met and the factors that ASIC and the RBA would take into consideration could be included in Corporations Regulations, other legislative instruments and/or revised regulatory guidance. These details are set out in Section 5 of this consultation paper, and are accompanied by case studies that demonstrate how the revised test would be applied.

It is proposed that where ASIC, in consultation with the RBA, considers a CS facility's domestic connection to be material, ASIC would make a formal determination to that effect. A CS facility that had a material domestic connection would be required to have an Australian CS facility licence or be exempt from the operation of Part 7.3 of the Corporations Act. Positive decisions on the materiality of a CS facility's domestic connection will be evidenced in the advice on a CS facility's application for an Australian CS facility licence or exemption provided by ASIC and the RBA to the Minister.

This approach would ensure the appropriate regulation of all CS facilities with a connection to the Australian financial system or its users, so that an overseas CS facility with a connection to the Australian financial system that was not material is not required to be either licensed or exempted from Part 7.3 of the Corporations Act.

Under this approach, the materiality of a CS facility's connection to the Australian financial system may reflect either a single characteristic or a combination of characteristics, and it is not possible to establish definitive thresholds for materiality that would apply in all circumstances. Accordingly, this test would require the exercise of judgement by ASIC, in consultation with the RBA. This approach should provide additional clarity to all stakeholders, while also retaining necessary flexibility within the Australian CS facility licensing regime.

Overseas Clearing and Settlement Facilities: The Australian Licensing Regime, 2015 Response to Consultation, Council of Financial Regulators

Introduction and Background

In March 2015, the Council of Financial Regulators (CFR) released the consultation paper 'Overseas Clearing and Settlement Facilities: The Australian Licensing Regime'.1 The consultation paper sought stakeholder views on a proposed new approach to assessing whether an 'overseas' clearing and settlement (CS) facility (i.e. a CS facility that is not operated by a body corporate registered under Chapter 2A of the Corporations Act 2001 (the Corporations Act)) must be either licensed in Australia or exempted from Part 7.3 of the Corporations Act.

The Australian Securities and Investments Commission (ASIC) and the Reserve Bank of Australia (RBA) – together, the regulators – are receiving an increasing number of queries from overseas CS facilities as to whether they fall within the scope of the licensing regime. These queries have arisen primarily due to a lack of clarity around whether an overseas CS facility is 'operating in this jurisdiction', which is the relevant test in Part 7.3 of the Corporations Act. The purpose of the proposed new approach is to promote Australian entities' access to a diverse range of CS options, both in Australia and overseas, by providing clarity and increased legal certainty to all stakeholders on the scope of the Australian CS facility licensing regime.

The proposal rests on a two component test of the materiality of the CS facility's connection to the Australian financial system. An overseas CS facility will be required to be licensed (or formally exempted from licensing) if, and only if, it has a material domestic connection. The policy intention is to capture only facilities with operations that have, or are expected to have, implications for the safe, efficient and effective functioning of the Australian financial system or the confident, fair and effective dealings in financial products by Australian investors. At the same time, the approach aims to strike an appropriate balance between public policy relevance and appropriate cross-border reach.

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First component: A CS facility's domestic connection. The first component of the test would establish objectively if the operations of a CS facility were in any way connected to the Australian financial system. It is intended that this component provide a high degree of certainty for all stakeholders as to when a CS facility is not within the scope of the Australian CS facility licensing regime. The factors that would constitute a domestic connection include: the location of a CS facility's operations in Australia; the provision of CS services for financial products connected with Australia; the provision of CS services to one or more Australian participants; or having arrangements with the operator of a domestically licensed or exempted financial market or CS facility.

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Second component: Materiality of a CS facility's domestic connection. Where the first component of the test established that an overseas CS facility had a domestic connection, the second component would assess the materiality of that connection. A CS facility's connection to the Australian financial system would be material if ASIC, in consultation with the RBA, was satisfied that the facility's current or expected activities were material to the safe, efficient and effective functioning of the Australian financial system or the confident, fair and effective dealings in financial products by Australian investors. To provide additional clarity to all stakeholders, the circumstances in which the materiality test was likely to be met and the factors that the regulators would take into consideration could be described in revised regulatory guidance or another legislative instrument.

The proposed test would be implemented through legislative reform to the Corporations Act. It is proposed that the Corporations Act would set out the test at a high level, with more detailed criteria set out in legislative instruments (e.g. a Ministerial determination or regulations) and/or revised regulatory guidance.

It is not expected that the proposed new approach would result in additional CS facilities falling within the scope of Australia's CS facility licensing regime. Furthermore, the rest of the Australian CS facility licensing regime would remain unchanged by this proposal. The factors relevant to consideration of the materiality of a CS facility's connection to the Australian financial system by the regulators are already listed in ASIC's Regulatory Guide 211 – Clearing and Settlement Facilities: Australian and Overseas Operators (RG 211). The intent of the proposed approach is to formalise how these factors are currently, and in the future will be, weighed in reaching judgements around regulatory scope so as to provide clarity and transparency for prospective future CS facility licence applicants.

The CFR has considered feedback received from consultation on the initial proposal. The remainder of this report summarises the key feedback from stakeholders along with the CFR's views on how this feedback should be addressed in implementing the proposed framework. Any legislative change will ultimately be a matter for the government to consider.

Overview of Consultation Responses and Response to

Feedback

The CFR received five written submissions from stakeholders, including from major overseas CS facilities. This section summarises the stakeholder feedback received and sets out the CFR's responses.

On balance, stakeholders agreed that the proposed approach would provide useful additional clarity on whether a CS facility should be licensed in Australia or exempt from Part 7.3 of the Corporations Act. There was support for the proposed criteria and stakeholders generally acknowledged the need for the test to be flexible. Such flexibility was seen as important to ensure that the regulators could respond appropriately to future changes in the provision of CS services.

Case for reform

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Two stakeholders commented that the current test in section 820A of the Corporations Act (i.e. whether a CS facility was 'operating in this jurisdiction') and the broader Australian CS facility licensing regime were functioning effectively. One of those stakeholders considered that the case for reform was not made in the consultation paper and that higher priority should be assigned to other more important financial sector reforms currently underway.

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As noted in the consultation paper, the regulators have identified, through discussions with a number of overseas CS facilities, that there is a lack of clarity in the existing regime. Accordingly, the CFR considers that there would be substantial benefit to providing greater clarity, as well as increased legal certainty, for all stakeholders on the circumstances in which a CS facility must be either licensed in Australia or exempted from Part 7.3 of the Corporations Act. Indeed, the majority of feedback agreed that the proposed approach provided more clarity relative to the current test. Furthermore, by providing additional clarity, while maintaining flexibility, it is expected that the proposal will continue to promote Australian entities' ongoing access to a diverse range of CS options, both in Australia and overseas.

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The CFR recommends that the changes to the Corporations Act required to implement the proposal set out in the consultation paper be made in conjunction with proposed legislative reforms required to implement a special resolution regime for CS facilities and trade repositories (together referred to as financial market infrastructures (FMIs)). Linking the proposal to this high-priority package of legislative changes, for which there is considerable industry support, should address any concern that it might divert resources from other more pressing financial sector reforms. There is a natural link between these proposals. In particular, clarity as to the scope of the Australian CS facility licensing regime is foundational to defining the scope of application of the special resolution regime for FMIs. The core elements of the FMI resolution regime would apply to CS facilities that held a domestic CS facility licence, but a subset of proposed powers would apply to any overseas CS facility within the scope of the Australian CS facility licensing regime. These reforms are expected to occur as part of a broader package of financial sector reforms implemented in response to the Financial System Inquiry.

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There were no objections to the proposal that a CS facility with a domestic connection should notify the regulators. However, some stakeholders queried how this requirement would be enforced and noted that appropriate incentives would be required to encourage overseas CS facilities to assess themselves against the test and notify the regulators accordingly.

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The CFR would generally expect most overseas CS facilities to have a sufficiently strong incentive to notify the regulators of any domestic connection. Such a notification would trigger a determination from the regulators as to whether the domestic connection was material. A determination on materiality would in turn provide certainty for the CS facility and its participants as to whether the CS facility needed to be licensed to conduct any activities that had a connection with Australia. The CFR would also generally expect that some Australian participants would encourage any overseas CS facility that they used to seek the necessary determination, in order to avoid the potential for implementation of higher capital requirements if there were uncertainties about the regulatory regime that applied to the CCP. Accordingly, the CFR considers there should already be sufficient incentives in place to encourage correct self-assessment and notification to the regulators.

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Nevertheless, the CFR proposes that in consulting on the draft legislative amendments to the Corporations Act to implement the proposed framework, further consideration could usefully be given to additional mechanisms to promote compliance with the notification requirement. This could include the regulators being granted a specific and limited power to make enquiries of an overseas CS facility to ascertain whether the CS facility had a domestic connection. It is expected that any such power would only be exercised in limited circumstances; for instance, where the regulators had reason to believe that a CS facility had a domestic connection but had not provided the required notification.

Materiality of a CS facility's domestic connection

The majority of stakeholder feedback related to the second component of the test, which addresses the materiality of a CS facility's domestic connection.

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Further guidance and quantitative thresholds: Some stakeholders sought further guidance on various aspects of the materiality component of the test. In particular, they favoured quantitative criteria and thresholds to provide additional certainty.

-

The CFR acknowledges the desire for more certainty. However, close consideration was given to this matter in developing the proposal and the CFR concluded that to adopt quantitative thresholds would unduly restrict the regulators in weighing the various factors relevant to determining the materiality of a CS facility's domestic connection. This could result in the regime capturing some CS facilities that were not relevant to the safe, efficient and effective functioning of the Australian financial system or the confident, fair and effective dealings in financial products by Australian investors, and excluding some CS facilities that were relevant. Including quantitative criteria and thresholds in the proposal would also add rigidity by limiting the scope of the regulators to respond to future changes in the provision of CS services. Ensuring sufficient flexibility was a particular consideration for the CFR in developing the approach. Indeed, the need to avoid undue rigidity was seen by two stakeholders as crucial to ensuring that the licensing regime was not a barrier to Australian entities accessing overseas CS facilities to support their financial market activities.

-

Through the proposed framework, the CFR has sought to strike an appropriate balance between the need for legal certainty and the need both to allow the regulators flexibility to exercise judgement in weighing relevant factors, and to respond to future changes in the structure and operation of financial markets and CS facilities. Accordingly, the regulators favour engaging bilaterally with overseas CS facilities and providing additional guidance on a case-by-case basis.

•

Australian users: Informal bilateral feedback was provided querying whether the term 'user' could be defined more restrictively to apply to an ascertainable population of indirect users of CS facilities.

-

One of the purposes of regulating CS facilities is to protect investors dealing in financial products and other users of CS facilities. The CFR therefore considers it appropriate that the reference to 'Australian users' be retained in the materiality component without defining the term more restrictively. The CFR recognises there may be some practical impediments to a CS facility's ability to identify Australian users, particularly where a CS facility has no direct contractual relationship with its indirect users – and especially where there are several tiers of indirect users. The regulators would expect to engage with any overseas CS facility that had a domestic connection to understand what information on indirect users was available and how the determination could best be made without imposing an undue regulatory burden.

•

Affiliated operators: One stakeholder recommended that where different entities in an affiliated group operate CS facilities (i.e. CS services) for different classes of products, the materiality of those different CS facilities be assessed separately.

-

In assessing the materiality of a CS facility's connection, the regulators would expect to assess each CS facility separately, recognising that a legal entity may operate multiple CS facilities, or that multiple CS facilities may be operated by different legal entities that are part of the same affiliated group (particularly for different product types). Part 7.3 of the Corporations Act recognises that one entity could operate more than one CS facility. The regulators would consider, on a case-by-case basis, what constituted an individual CS facility as this would depend on a number of factors, including the corporate, organisational, operational and financial structure of the CS facility operator's activities. In addition, the regulators would assess each legal entity that operates a CS facility individually, and would not assess affiliated legal entities together.

Transitional arrangements

•

Stakeholders sought additional clarity on transitional arrangements, where a CS facility's domestic connection that was not previously determined to be material became material over time (e.g. where the number of Australian participants or volume grew over time).

-

The CFR proposes that in consulting on the draft legislative amendments to implement the proposed framework, further consultation be undertaken on appropriate transitional arrangements for CS facilities that become more materially connected over time. For a CS facility that was determined not to have a material domestic connection, it is envisaged that some form of regular reporting and/or engagement would continue with the regulators. Through this process, the regulators would be able to guide such a facility through any transitional arrangements should the assessment of its materiality change. It is expected that any transitional arrangements would provide the affected entity with a reasonable period of time to either transition to become licensed, or to reduce the materiality of its Australian activities.

•

Two stakeholders expressly agreed with the proposed approach that ASIC, in consultation with the RBA, would make a determination as to whether a CS facility's activities were material. One stakeholder, however, favoured a single regulatory point of communication, while another suggested that a decision on materiality should be subject to public consultation before a final determination was made.

-

Both ASIC and the RBA have regulatory responsibilities under the Corporations Act in relation to CS facilities, and it is therefore appropriate that overseas CS facilities communicate with both regulators. However, the regulators carry out their responsibilities in a cooperative and coordinated manner in order to prevent unnecessary duplication of effort and to minimise the regulatory burden on facilities.

-

The regulators would not generally expect to consult publicly in determining the materiality of a CS facility's domestic connection, since such a decision would be taken in the context of the routine exercise of regulatory responsibility.

Implementation

•

Implementation: One stakeholder agreed that codifying the key elements of the framework in the Corporations Act and associated regulations would provide more certainty for stakeholders; although two stakeholders noted that the proposed approach could introduce unnecessary rigidity. It was also suggested that in making the legislative changes, the regulators should consult on timing and content with overseas regulators to mitigate cross-border regulatory conflict.

-

Consistent with the consultation paper, the CFR considers that the overarching, high-level test could be incorporated into the Corporations Act, with the associated circumstances and factors for consideration implemented through a legislative instrument (e.g. a Ministerial determination or regulations) and/or revised regulatory guidance. Including the more detailed factors for consideration in revised regulatory guidance would ensure that the proposed framework retained the flexibility necessary for the regulators to consider each CS facility's circumstances on a case-by-case basis, while providing clarity for stakeholders about how the regulators expected to apply the framework. Further public consultation would take place on the text of draft legislation, regulation and guidance, and any comments from overseas entities and regulators would be considered.

Other stakeholder feedback

Some stakeholders also raised issues that were less widely commented on among respondents.

•

A CS facility's domestic connection – branches of Australian institutions: One stakeholder suggested that in considering whether a CS facility provided CS services to an Australian participant, the regulators should differentiate between overseas branches of Australian financial institutions that were also supervised by an overseas authority, and the Australian financial institutions located in Australia.

-

Where a CS facility provides CS services directly to an overseas branch of an Australian institution, that branch would be considered to be an Australian participant since it is not a separate legal entity. While the provision of services to an Australian participant would constitute a domestic connection requiring notification to the regulators, it would not automatically mean that the CS facility was required to be licensed in Australia or exempt from licensing under Part 7.3 of the Corporations Act; the regulators would still need to form a judgement as to whether the CS facility's domestic connection was material.

•

Arrangements with other financial markets or CS facilities: One respondent suggested avoiding a direct link between licensing requirements for CS facilities and market operators that belonged to the same group.

-

Under the proposed approach, a CS facility that had an arrangement with a financial market or CS facility operator that was licensed or exempt under the Australian regime would be considered to have a domestic connection. Furthermore, an arrangement with a holder of a domestic Australian market licence or an Australian CS facility licence (i.e. granted under section 795B(1) or section 824B(1) of the Corporations Act, respectively) would constitute a material domestic connection.

-

However, an arrangement with the holder of an overseas Australian market licence or an overseas Australian CS facility licence (i.e. granted under section 795B(2) or section 824B(2) of the Corporations Act, respectively), would not in and of itself constitute a material domestic connection.

Other matters

Individual stakeholders also raised other matters that were not within the scope of the consultation paper.

•

Mutual recognition with overseas jurisdictions: It was suggested that the CFR consider mutual recognition of regulatory oversight between the Australian and overseas regulatory authorities.

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The Australian regulatory regime already provides for recognition of oversight by an overseas regulatory authority. In particular, Part 7.3 of the Corporation Act provides an alternative licensing route for overseas CS facilities, which is intended to avoid regulatory duplication. This is available where the operation of a CS facility in an overseas country (i.e. a CS facility's 'home jurisdiction') is subject to requirements and supervision that are sufficiently equivalent to those in Australia. An assessment of sufficient equivalence is made when the facility submits an application for an Australian CS facility licence under section 824B(2) of the Corporations Act, rather than at the point at which a determination is made as to whether a facility falls within the scope of the licensing regime.

•

Disclosure for CS facility users about domestic and overseas CS facilities: Another stakeholder suggested that the framework should establish disclosure requirements to ensure that CS facility users understand the differences between dealing with an overseas licensed CS facility and a domestically licensed CS facility.

-

The CFR does not propose to consider such disclosure requirements as part of the legislative proposal at hand. Such disclosure requirements are only relevant once a CS facility is licensed. The Australian regulatory regime for CS facilities already requires certain disclosures which help to ensure that participants and other users are appropriately informed in their dealings with licensed CS facilities, whether domestic or overseas, including under the RBA's Financial Stability Standards. The regulators would consider if any additional disclosure was required on a case-by-case basis, and have, in some cases, imposed licence conditions requiring such disclosure.

Next Steps

The CFR is advising the government on the development of draft legislation that reflects the proposals set out in the CFR's March 2015 consultation paper and this response to consultation. The draft legislation will incorporate changes to the Corporations Act to implement a special resolution regime for FMIs, since the resolution regime for CS facilities would build on the licensing regime.²

Stakeholders will be given the opportunity to comment on draft legislation to implement the proposed changed approach to assessing whether an overseas CS facility must be either licensed in Australia or exempted from Part 7.3 of the Corporations Act in due course.

As similar issues also exist for financial markets, ASIC and Treasury are also considering the application of this proposed new approach to financial markets regulated under Part 7.2 of the Corporations Act.

¹ These proposals are described in the paper 'Resolution Regime for Financial Market Infrastructures: Response to Consultation', available at
http://www.cfr.gov.au/publications/cfr-publications/2015/resolution-regime-financial- market/.

Resolution Regime for Financial Market Infrastructures, 2015 Consultation Paper, Australian Government

INTRODUCTION AND EXECUTIVE SUMMARY

The Australian Government — acting on the advice of the Reserve Bank of Australia (RBA), the Australian Securities and Investments Commission (ASIC), the Australian Prudential Regulation Authority (APRA) (jointly, the Regulators) and the Australian Treasury — seeks stakeholder views on legislative proposals to establish a special resolution regime for clearing and settlement (CS) facilities and trade repositories (TRs), together referred to as financial market infrastructures (FMIs), consistent with international standards. Some of the legislative proposals in this paper relating to directions powers and international regulatory cooperation also extend to operators of domestically incorporated and licensed financial markets.

Considerable work has been done in recent years, both domestically and internationally, to develop best practice standards for bank resolution regimes. Attention has now turned to the establishment of similar regimes for FMIs.

Although robust risk management significantly reduces the likelihood of an FMI failure, the possibility of such failure is not entirely eliminated. With increasing dependence on centralised infrastructure, motivated in part by regulatory reforms, it is vital that the official sector clarifies how it would address a situation of FMI distress. The particular focus of this consultation paper is on resolution: actions taken by public authorities to either return an FMI to viability or facilitate its orderly wind-down. The associated concept of recovery refers to actions taken by a distressed FMI itself to return to viability.

The set of proposals described in this paper aims to ensure, as appropriate, the timely and effective resolution of a failing FMI in a manner that maintains financial system stability while avoiding the use of public funds to the maximum extent possible.

1.1 BACKGROUND

For the purposes of this paper, FMIs are defined as multilateral systems used to clear, settle and record financial transactions.

1. Clearing is a post-trade and pre-settlement function performed by financial market participants to manage trades and associated exposures. Through the legal process of novation, a central counterparty (CCP) interposes itself between counterparties to transactions executed in the markets it serves, becoming principal to each transaction so as to ensure performance of obligations.

2. Settlement is the point at which the counterparty exposures associated with a transaction are eliminated. In securities markets, settlement is facilitated by securities settlement facilities (SSFs).

3. TRs are facilities that centrally collect and maintain records on over-the-counter (OTC) derivatives transactions and positions for the purpose of making those records available to regulators and, to an appropriate extent, the public.

Internationally, the Financial Stability Board (FSB), the Committee on Payments and Market Infrastructures (CPMI, formerly the Committee on Payment and Settlement Systems (CPSS)) and the International Organization of Securities Commissions (IOSCO) have progressed work on international guidance for FMI recovery and resolution. The FSB adopted the

Key Attributes of Effective Resolution Regimes for Financial Institutions (the KAs) in October 2011, and the G20 Leaders endorsed these KAs in November 2011.¹ The FSB subsequently added guidance for applying the KAs to FMIs (the FMI Annex to the KAs) in October 2014. Together, the KAs and the FMI Annex to the KAs identify the powers and limits of a resolution framework for financial institutions, including FMIs. CPMI and IOSCO also published guidance on the development of recovery plans for FMIs in October 2014.² The guidance provided in these documents extends to CS facilities and TRs, but not financial markets.

The FSB is monitoring jurisdictions' progress in implementing the KAs, including in respect of FMIs, through a series of peer reviews. The first such review was published in April 2013 and noted that resolution regimes for FMIs were generally less developed than corresponding regimes for banks. Australia was one of sixteen jurisdictions identified in the report as having no administrative authority responsible for resolution of FMIs.

This gap had already been identified by the Council of Financial Regulators³ (the CFR) in its 2011 review of FMI regulation, which resulted in a recommendation to Government in February 2012 to develop a special resolution framework for CS facilities and financial markets. The CFR's review and recommendations did not apply to TRs, as TRs were not at that time subject to licensing and regulation under Chapter 7 of the Corporations Act 2001 (the Corporations Act).⁴ In particular, the CFR noted that 'the absence of a specialised resolution regime' for CS facilities and financial markets represented a gap in the current regulatory framework. The CFR's key recommendations were to:

4. strengthen the ability of regulators to deal with distress situations at key CS facilities and financial markets by streamlining and clarifying the directions powers provided in the legislation;

5. enhance the ability of regulators to maintain financial stability in times of stress by establishing a statutory management (step-in) regime allowing ASIC and the RBA to take control of a domestically licensed CS facility or financial market in certain defined circumstances.

In principle, if a comprehensive recovery plan could be executed effectively, resolution would not be necessary. However, in some circumstances, an FMI may be unable to fully implement its recovery plan without direct public intervention. In others such intervention may be desirable in the interests of financial system stability, even if recovery actions could be taken. The availability of a special resolution regime as an alternative to general insolvency would allow actions to be taken by a resolution authority with a system-wide perspective. In particular, the resolution authority would seek to restore critical services to viability, while allowing non-critical services to be wound down in an orderly manner. Ancillary powers would be provided for the resolution authority to pursue alternative means of maintaining service continuity, such as a transfer of operations to another entity.

^1. FSB, Key Attributes of Effective Resolution Regimes for Financial Institutions, October 2014, available at:
www.financialstabilityboard.org/2014/10/r_141015/

^2. CPMI-IOSCO, Recovery of financial market infrastructures, October 2014, available at:
www.bis.org/cpmi/publ/d121.htm

^3. The Australian Treasury, the Reserve Bank of Australia, the Australian Securities and Investments Commission and the Australian Prudential Regulation Authority.

^4. See the CFR's recommendations to government on recommendations from its review of FMI regulation. The CFR's letter to the then Deputy Prime Minister and Treasurer is available at:
www.treasury.gov.au/ConsultationsandReviews/Consultations/2012/CFR-Financial-Market-Infrastructure- Regulation

A legislative framework that clearly identified the tools and powers available to a relevant resolution authority would provide valuable certainty to market participants. This would be particularly important in times of stress.

1.2 LEGISLATIVE PROPOSALS

In developing legislative proposals for an Australian FMI resolution regime, the Government has sought to ensure consistency with the KAs, as well as the recommendations of the 2011-12 CFR review of FMI regulation.

In globalised financial markets, international standards for resolution regimes provide an important common benchmark for all jurisdictions to follow. It is therefore proposed that the domestic regime be consistent with the KAs and the FMI Annex to the KAs, which apply to CS facilities and TRs. Attachment A includes a table that maps the proposed regime against the KAs and the FMI Annex.

The proposals in this paper are also designed, where relevant, with reference to powers available to APRA under the Banking Act 1959 (the Banking Act) and the Financial Sector (Business Transfer and Group Restructure) Act 1999 (the Business Transfer Act) for the resolution of authorised deposit-taking institutions (ADIs).

1.2.1 Institutional scope, objectives and resolution authority

The legislative proposals in this paper extend to:

•

all CS facilities that are incorporated in Australia and hold a domestic CS facility licence;

•

all TRs that are incorporated and licensed in Australia and that are identified as being systemically important in Australia.

Some of the legislative proposals in this paper also extend to financial markets that are incorporated in Australia and hold a domestic market licence.

Consistent with the CFR's published framework for regulatory influence over cross-border CS facilities, additional amendments to the Corporations Act are proposed to require all systemically important cross-border CS facilities that are strongly connected to the Australian financial system and real economy to operate from an entity incorporated in Australia, and hold a domestic CS facility licence. This would bring them within the scope of the resolution powers proposed in this paper.

Once an FMI was in resolution, certain powers would also extend to any related entity that provided the FMI with critical services or funding support under ex-ante legal arrangements.

It is proposed that the RBA would act as resolution authority for CS facilities, and ASIC as resolution authority for TRs. An overarching objective for the RBA in taking resolution actions in relation to CS facilities would be to maintain overall stability in the financial system.⁵ Consistent with maintaining system stability, an additional common key objective of both resolution authorities would be to maintain the continuity of CS facility and TR services that are critical to the smooth functioning of the financial system. These objectives would be complemented by a set of considerations for the resolution authorities, covering matters such as maintenance of market confidence and integrity, protection of public funds, and minimisation of the costs of resolution to creditors and shareholders.

^5. ASIC does not have a financial stability mandate in relation to TRs.

1.2.2 Resolution powers

The objectives of the resolution authority may be best pursued by taking actions in accordance with an FMI's own operating rules, including the allocation of uncovered losses. These actions would be supported by a range of powers available to the resolution authority.

The legislative proposals draw a distinction between general conditions (those that establish the case for public intervention) and specific conditions (those that are used to select between particular resolution actions) for the exercise of resolution powers. The powers proposed for the resolution authority in relation to FMIs are:

•

Statutory management. The power to appoint an individual, company or the resolution authority itself to temporarily administer a distressed FMI in a manner consistent with the objectives of the resolution regime. The statutory manager would assume the powers of the FMI's board, including carrying out recovery measures and other actions in accordance with the FMI's rulebook. The exercise of powers by the statutory manager would be overseen by the resolution authority.

•

Moratorium on payments to general creditors. The power to suspend an FMI's payment obligations to general creditors. This would exclude payments made in relation to core FMI activities (such as margin payments and settlement of securities transactions).

•

Transfer of operations to a third-party or bridge institution. The power to compulsorily transfer all or part of an FMI's operations to a willing third-party purchaser, or a temporary bridge institution established by public authorities. A transfer to the latter would be intended as an interim step towards a return to private sector ownership under new governance arrangements.

•

Temporary stay on early termination rights. The power to impose a temporary stay of up to 48 hours on termination rights (with respect to future obligations) that may be triggered solely by an FMI's entry into resolution. It is also expected that FMIs would ensure that such termination rights were not included in their rules or contracts with critical third-party suppliers.

1.2.3 Safeguards and funding arrangements

The powers available to the resolution authority have the potential to significantly impact participants and other stakeholders that have dealings with FMIs. The legislative proposals provide a right to compensation from the Commonwealth should participants or other stakeholders be left worse off in resolution than they would have been had the FMI entered general insolvency.⁶ The proposals also include an immunity from liability for the resolution authority, statutory manager and others acting in compliance with the directions of the resolution authority.

^6. A modified compensation test could apply where resolution actions were taken to address a deficiency in financial resources that was not large enough to trigger insolvency, or other non-insolvency related threats to service continuity.

It is envisaged that in some resolution scenarios, there could be a need to draw on public funds to provide temporary liquidity, to ensure the timely disbursement of operating expenses, or in some extreme cases to meet a small shortfall required to complete an FMI's closeout processes. In each of these cases the Government would seek to recover any expenditure from participants and shareholders of the FMI.

1.2.4 International cooperation and supporting requirements

The institutional scope of the proposed resolution regime does not extend to overseas-based FMIs. However, the proposals recognise that Australian authorities should also have the capacity to take limited action in support of resolution actions by overseas authorities in respect of overseas-based FMIs and financial markets that are licensed to operate in Australia. It is not currently expected that legislative change would be required to enable the relevant authorities to engage in information-sharing with foreign authorities or to participate fully in multilateral cooperative crisis management arrangements for such FMIs and financial markets. The proposal nevertheless considers measures to give a legislative basis for the cooperation of a foreign authority responsible for oversight of any overseas-based FMI or financial market that holds an Australian licence.

The proposals also address several matters required to support the practical implementation of the resolution regime, although these are not expected to require specific legislation. These include the development and maintenance of recovery and resolution plans, and assessments of the feasibility of resolution plans for each FMI.

1.2.5 Directions powers

While not a particular focus of the KAs, the legislative proposals set out a range of enhancements to the powers of regulators and resolution authorities to give directions to FMIs and financial markets. These powers, primarily designed to support the successful implementation of recovery and resolution actions, also develop some more general recommendations made by the CFR following the 2011-12 consultation. They would introduce a streamlined process for the timely issuance of directions, and also strengthened sanctions for a failure to comply, including criminal sanctions.

Among the recommendations, it is proposed that the RBA be granted the power to issue directions to CS facilities on its own behalf in respect of matters relevant to its financial stability responsibilities. In addition, it is proposed that ASIC and the RBA would each be granted the power to issue directions to support an FMI's recovery actions and its own resolution actions. These powers would extend to ASIC's regulatory role in respect of financial markets. Resolution-related directions powers would extend to related entities of an FMI that provided critical services or funding to the FMI under ex-ante legal agreements (for example, the holding company of an FMI, or an operational affiliate).

1.3 OUTLINE OF CONSULTATION PAPER

The remainder of the paper is structured as follows. Section 2 discusses the intended institutional scope of the special resolution regime, as well as the statutory objectives and the proposed resolution authority for each of CS facilities and TRs. Section 3 discusses the relationship between an FMI's own recovery measures and resolution, going on to consider the triggers for entry into resolution and the range of powers and tools that would be made available to the resolution authority. Sections 4 and 5 respectively cover safeguards and funding arrangements, and international cooperation. Section 6 closes with proposals for enhancements to the directions powers available to ASIC and the RBA, both to support recovery and resolution actions and day-to-day oversight activities.

Resolution Regime for Financial Market Infrastructures, 2015 Response to Consultation, Council of Financial Regulators

Introduction and Background

In February 2015, the Australian Government, acting on the advice of the Council of Financial Regulators (CFR) — made up of the Reserve Bank of Australia (RBA), the Australian Securities and Investments Commission (ASIC), the Australian Prudential Regulation Authority (APRA) and the Australian Treasury — released a consultation paper seeking stakeholder views on legislative proposals to establish a special resolution regime for clearing and settlement (CS) facilities and trade repositories, together referred to as financial market infrastructures (FMIs).¹ Some of the legislative proposals in the paper also extend to domestically incorporated holders of a domestic market licence.²

The key features of the legislative proposals set out in the government's consultation paper are summarised below. The proposals are aligned with the Financial Stability Board's (FSB's) Key Attributes of Effective Resolution Regimes for Financial Institutions (the Key Attributes), including an Annex that addresses how the general principles set out in the Key Attributes can be adapted in designing resolution regimes for FMIs (FMI Annex).³

•

Institutional scope, objectives and resolution authority. The FMI resolution regime would extend to operators of CS facilities that are incorporated in Australia and hold a domestic CS facility licence,4 as well as trade repositories that are incorporated and licensed in Australia. The RBA would act as resolution authority for CS facilities, and ASIC as resolution authority for trade repositories. An overarching objective for the RBA in taking resolution actions in relation to CS facilities would be to maintain overall stability in the financial system, with an additional common key objective for both resolution authorities to maintain the continuity of CS facility and trade repository services that are critical to the smooth functioning of the financial system. These objectives would be complemented by a set of considerations for the resolution authorities in choosing between resolution actions, covering matters such as maintenance of market confidence and integrity, protection of public funds, and minimisation of the costs of resolution to creditors and shareholders.

-

A complementary proposal would require all systemically important CS facilities that are strongly connected to the Australian financial system or real economy to be operated by an entity that is incorporated in Australia and holds a domestic CS facility licence.

•

Resolution powers. The objectives of the resolution authority may be best pursued by taking actions in accordance with an FMI's own operating rules, including the allocation of uncovered losses. These actions would be supported by a range of powers available to the resolution authority. The powers proposed for the resolution authority in relation to FMIs are:

-

Statutory management. The power to appoint an individual, company or the resolution authority itself to temporarily administer a distressed FMI in a manner consistent with the objectives of the resolution regime. The statutory manager would assume the powers of the FMI's board, including carrying out recovery measures and other actions in accordance with the FMI's rulebook. The exercise of powers by the statutory manager would be overseen by the resolution authority.

-

Moratorium on payments to general creditors. The power to suspend an FMI's payment obligations to general creditors. This would exclude payments made in relation to core FMI activities (such as margin payments and settlement of securities transactions).

-

Transfer of operations to a third party or bridge institution. The power to compulsorily transfer all or part of an FMI's operations to a willing third-party purchaser, or a temporary bridge institution established by public authorities. A transfer to the latter would be intended as an interim step towards a return to private sector ownership under new governance arrangements.

-

Temporary stay on early termination rights. The power to impose a temporary stay of up to 48 hours on termination rights (with respect to future obligations) that may be triggered solely by an FMI's entry into resolution. It is also expected that FMIs would ensure that such termination rights were not included in their rules or contracts with critical third-party suppliers.

•

Safeguards and funding arrangements. The legislative proposals provide a right to compensation from the Commonwealth should participants or other stakeholders be left worse off in resolution than they would have been had the FMI entered general insolvency. The proposals also include an immunity from liability for the resolution authority, statutory manager and others acting in compliance with the directions of the resolution authority. It is envisaged that in some resolution scenarios, there could be a need to draw on public funds. In such cases, the government would seek to recover any expenditure from participants and shareholders of the FMI.

•

International cooperation and supporting requirements. The proposals recognise that Australian authorities should also have the capacity to take limited action in support of resolution actions by overseas authorities in respect of overseas-based FMIs and financial markets that are licensed to operate in Australia. The proposals also address several matters required to support the practical implementation of the resolution regime, although they are not expected to require specific legislation. These matters include the development and maintenance of recovery and resolution plans, and assessments of the feasibility of resolution plans for each FMI.

•

Directions powers. The legislative proposals set out a range of enhancements to the powers of regulators and resolution authorities to give directions to FMIs and financial markets. These powers, primarily designed to support the successful implementation of recovery and resolution actions, also develop some more general recommendations made by the CFR in 2012.⁵ They would introduce a streamlined process for the timely issuance of directions, and also strengthen sanctions for a failure to comply, including criminal sanctions. Among the recommendations, it is proposed that the RBA be granted the power to issue directions to CS facilities on its own behalf in respect of matters relevant to its financial stability responsibilities. In addition, it is proposed that ASIC and the RBA would each be granted the power to issue directions to support an FMI's recovery actions and its own resolution actions. These powers would extend to ASIC's regulatory role in respect of financial markets (as recommended by the CFR in 2012). Resolution-related directions powers would extend to related entities of an FMI that provided critical services or funding to the FMI under ex ante legal agreements.

⁵ See CFR (2012), 'Review of Financial Market Infrastructure Regulation: Letter to the Deputy Prime Minister and Treasurer', February. Available at
http://www.treasury.gov.au/ConsultationsandReviews/Consultations/2012/~/media/Treasury/Consultations%20and%20Reviews/Consultations/2012/CFRWG%20on%20Financial%20Market% 20Infrastructure%20Regulation/Key%20Documents/CoFR_Letter_to_Deputy_PM.ashx.

Internationally, while a number of jurisdictions have taken steps towards implementation of FMI resolution regimes (including the United Kingdom and Hong Kong), most jurisdictions are still in the early stages of implementing guidance set out in the FMI Annex to the Key Attributes. The progress of international authorities in implementing FMI resolution, and any gaps in existing practices or guidance, will be examined as part of a broader work plan focused on central counterparties (CCPs) led by the FSB in cooperation with the Committee on Payments and Market Infrastructures, International Organization of Securities Commissions and Basel Committee on Banking Supervision. This work is intended to promote CCP resilience, recovery planning and resolvability, with the FSB leading work on CCP resolution.

The CFR has considered feedback received from consultation on the initial proposals on FMI resolution summarised above, as well as continuing developments internationally. The remainder of this report summarises the key feedback from stakeholders and sets out the CFR's views on how this feedback should be addressed in developing draft legislation to establish an Australian FMI resolution regime. Stakeholders are invited to comment on these view

Review of Financial Market Infrastructure Regulation, 2011 Consultation Paper, Council of Financial Regulators

Executive summary

At the request of the Deputy Prime Minister and Treasurer, the Hon. Wayne Swan MP, the Council of Financial Regulators (the Council) is conducting a review of the regulatory framework for financial market infrastructure (FMI) in Australia (the Review).

The need to undertake the Review was highlighted in the course of the regulatory agencies' consideration of the proposed takeover of ASX Limited (ASX) by Singapore Exchange Limited (SGX).

The regulatory issues considered in this paper are among the reasons why the Deputy Prime Minister and Treasurer concluded that SGX's proposed takeover of ASX was not in the national interest. The Deputy Prime Minister and Treasurer in his decision referred to the Foreign Investment Review Board's (FIRB's) finding, which incorporated advice from the Australian Securities and Investments Commission (ASIC) and the Reserve Bank of Australia (RBA), that:

not having full regulatory sovereignty over the ASX-SGX holding company would present material risks and supervisory issues impacting on the effective regulation of the ASX's operations, particularly its clearing and settlement functions. Australia's financial regulators have advised me that reforms to strengthen our regulatory framework should be a condition of any foreign ownership of the ASX to remove these risks.¹

To address these issues, the Deputy Prime Minister and Treasurer asked the Council to establish a Working Group to consider potential measures that could be introduced to ensure that Australian regulators could continue protecting the interests of Australian issuers, investors and market participants. A key consideration is to preserve the integrity of Australia's financial infrastructure and the ability of supervisors to maintain robust oversight and appropriate control in all market conditions, including in the advent of a range of different ownership structures for FMIs of systemic importance to the Australian financial system.

More broadly, the increasing interconnectedness of global markets means that the Australian regulatory framework must keep pace with developments offshore. In that regard, if Australian FMIs are to link with an offshore FMI, or offshore-owned FMIs are to operate in domestic markets, there is a need to maintain robust oversight and appropriate control of such infrastructures. These regulatory concerns extend to crisis resolution arrangements.

While some relevant international regulatory concerns pre-date the global financial crisis, the crisis has given impetus to ensuring that the interconnections between systemically important financial institutions and FMIs do not give rise to significant systemic risks (or that those risks are robustly mitigated). The Wall Street Reform and Consumer Protection Act (US) 2010 (Dodd-Frank), the proposed European Market Infrastructure Regulation (EMIR)² and the United Kingdom (UK) Treasury's White Paper on Financial Markets,³ all address these issues.

One approach has been to seek to centrally manage risks formerly addressed bilaterally (for example in over-the-counter (OTC) derivatives markets). The Group of Twenty countries (G20) have committed to require that all standardised OTC derivative contracts should be traded on exchanges or electronic trading platforms, where appropriate, and cleared through central counterparties (CCPs) by the end of 2012.

At the same time as this regulatory scrutiny has been unfolding, there has been an acceleration of consolidation activity across FMIs. Some FMIs and trading venues are seeking alliances to enhance their competitiveness. Other trading venues and FMIs have been seeking consolidation at the exchange or clearing level. It is not yet clear how these strategies, or regulators' reactions to them, will play out.

Accordingly, quite apart from the circumstances surrounding ASX, which have prompted renewed focus of Australian Government and agencies on these issues, a review of Australia's regulatory framework for FMIs is timely to ensure Australia's regulatory framework is at least as robust as those of other international financial centres.

Improving the regulatory framework for FMIs in Australia will not only underwrite the continued integrity of Australia's market infrastructure and so contribute to the efficiency and stability of Australia's financial system, but will also ensure that Australia remains open to foreign investment and foreign financial service providers.

Part A of this paper:

•

describes the Treasurer's terms of reference and the regulatory framework including the existing responsibilities and powers of regulators (see chapter 2);

•

describes Australia's FMIs of systemic importance (see chapter 3); and

•

describes certain weaknesses in the regulatory framework, particularly in comparison with regulatory powers in respect of authorised deposit-taking institutions (ADIs) (see chapter 4).

Part B of this paper sets out the Council's proposed regulatory responses to the issues identified. Part C of this paper explains the next steps and sets out the questions for stakeholder feedback.

¹ Deputy Prime Minister and Treasurer, Media Release No. 030 of 8 April 2011, available at
http://www.dpm.gov.au/DisplayDocs.aspx?doc=pressreleases/2011/030.htm.

² On 15 September 2010, the European Commission published its final proposal for a Regulation of the European Parliament and of the Council (also widely known as European Market Infrastructure Regulation – EMIR), which sets out to increase stability within OTC derivative markets. The EMIR introduces: a reporting obligation for OTC derivatives; a clearing obligation for eligible OTC derivatives; measures to reduce counterparty credit risk and operational risk for bilaterally cleared OTC derivatives; common rules for central counterparties (CCPs) and for trade repositories; and rules on the establishment of interoperability between CCPs. At the time of writing the most recent draft compromise text published by the European Council was available at
http://register.consilium.europa.eu/pdf/en/11/st13/st13595.en11.pdf.

³ HM Treasury, A new approach to financial regulation: the blueprint for reform (Cm 8083 June 2011).

Review of Financial Market Infrastructure Regulation, Advice to Government, Council of Financial Regulators

10 February 2012

The Hon. Wayne Swan, MP

Deputy Prime Minister and Treasurer Parliament House

CANBERRA ACT 2600

Dear Deputy Prime Minister,

REVIEW OF FINANCIAL MARKET INFRASTRUCTURE REGULATION

I refer to your letter of 8 April 2011 asking the Council of Financial Regulators (Council) to consider possible measures to ensure that the regulatory regime for financial market infrastructures (FMls) continues to protect the interests of Australian issuers, investors and market participants.

In response to your letter, a Working Group was established by the Council, chaired by the Treasury, and comprising representatives of the Council agencies. During 2011, the Working Group developed a number of proposals to maintain the integrity, stability and efficiency of Australia's FMis and the ability of FMI supervisors to maintain robust oversight and appropriate control in all market conditions and under a range of different ownership structures.

The Working Group consulted on its proposals in late 2011, publishing a consultation paper, Council of Financial Regulators: Review of Financial Market Infrastructure Regulation, and holding roundtable meetings with interested stakeholders. Four confidential responses and eighteen public responses were received; the public responses were published in early December. A list of respondents is attached.

Most stakeholders acknowledged that the paper identified valid regulatory considerations, though some expressed concerns about the implementation of the proposals and sought clarity on points of detail. The Council therefore recommends legislation broadly in line with the proposals in the consultation paper, but with some refinements and clarifications to ensure that any reforms introduced include appropriate checks and balances.

The following advice sets out the Council's final proposals, based on the analysis carried out by the Working Group during 2011, and stakeholder feedback received during consultation. In formulating the proposals, the Council has had regard to relevant international developments.

Proposals for reform

The Council considers that, while FMis have different characteristics to Authorised Deposit-taking Institutions (ADis), both types of entity can be of systemic importance. It is therefore vital that the FMI regulators, ASIC and the Reserve Bank, have appropriate powers to ensure that FMis manage risks effectively and that any financial distress or operational disruption to an FMI can be dealt with in a manner consistent with continued financial stability. As will be outlined below, the Council considers that statutory powers for the regulation of ADis under the Banking Act provide a useful model for a number of reforms to strengthen the regulatory framework for FMis.

The Council has also identified areas of further reform, including the extension of ASIC's and the Reserve Bank's powers to ensure that a related entity takes reasonable steps to comply with a direction or licence condition where it provides critical services to an FMI. It is recommended that these reforms also be considered in due course, perhaps alongside any relevant future amendments to the Banking Act, or in conjunction with other proposals that may arise from ongoing international dialogue on FMI resolution.

The Council's proposals cover a broad scope of issues and seek to ensure that ASIC and the Reserve Bank can continue to preserve the integrity, stability and efficiency of Australia's financial infrastructure and maintain robust oversight. The proposed measures are designed to be effective in all market conditions, including in the event of any future commercial arrangement between the ASX and another overseas exchange group, or where an overseas facility offers critical FMI services in Australia.

The Council recommends that the following reforms be pursued, with a view to having the framework in place as soon as reasonably practical. The Council is also considering releasing a short paper in the coming months summarising the purpose of the reforms and articulating Council agencies' views on concerns raised by stakeholders during the consultation process.

Regulatory powers of direction and intervention over FMis

The Council considered the effectiveness of regulatory powers of direction and intervention under various operational and financial stress scenarios. The Council also considered interactions with Australia's G-20 commitments in relation to infrastructure supporting over-the-counter (OTC) derivatives markets.

Location requirements

One direct way to increase the scope and effectiveness of regulatory oversight would be to streamline and clarify ASIC's and the Reserve Bank's powers to impose location requirements on licensed FMis.

In particular, the Council recommends that existing powers to impose licence conditions be clarified by giving ASIC and the Reserve Bank an explicit power to impose location requirements in key areas, such as financial and risk management and operational arrangements. In the case of an overseas-based FMI, the scope of such a power should also extend, where appropriate, to the establishment of oversight arrangements that give Australian regulators sufficient influence. In some circumstances, Australian regulators may also insist on a legal presence in Australia, or seek assurance as to the compatibility of the FMI's rules with Australian law. Importantly such requirements should be imposed in a proportional and graduated fashion, striking an appropriate balance between efficiency costs and stability benefits.

It is recommended that the basic power be afforded to ASIC and the Reserve Bank by way of enabling legislation through amendments to the Corporations Act. This should set out the objectives of this power and related criteria, while also providing agencies with flexibility to tailor requirements in a graduated way on a case-by-case basis. The scope of requirements could then be established in accompanying regulations.

It would be important to clarify in regulations and guidance the potential scenarios in which location requirements would typically be imposed, and set out the matters that regulators would take into account. These might include, for example, the systemic importance of the underlying market and the composition of the FMI's participants. Clear guidance along these lines would help address stakeholder concerns around arbitrary application of location requirements and their potential to act as a barrier to entry. Any such requirements should also be subject to consultation with affected parties.

Location requirements are an essential element in equipping ASIC and the Reserve Bank to effectively resolve FMI distress. They would also address a number of fundamental concerns identified by the agencies in the context of the SGX-ASX merger proposal. These include the potentially diminished capacity of domestic regulators to influence the operations of a systemically important FMI that is located offshore, particularly if that FMI serves markets in multiple jurisdictions.

This proposal would also support the Government's implementation of its G-20 commitments by providing a framework to establish whether location requirements are appropriate where central clearing or the use of trading platforms is mandated for OTC derivatives.

Direction-giving powers and sanctions

Regulators' capacity to influence outcomes would be enhanced by amendments to the direction-giving powers and sanctions provided for in the Corporations Act.

In particular, the Council recommends that the process by which ASIC can give directions to Australian Market Licensees (AMLs) and Clearing and Settlement Facility Licensees (CSFLs) be streamlined and clarified so as to facilitate more rapid and certain actions either in a financial or operational distress situation or in the event of a significant breach of licence conditions. The Council also recommends that the Reserve Bank be given the power to issue directions to CSFLs in relation to matters affecting financial stability.

To further increase the effectiveness of regulatory actions, the Council recommends broadening the range of sanctions available where licensees fail to comply with directions and licence conditions. In particular, these should be extended to include criminal sanctions, fines, and civil and administrative penalties. Furthermore, the scope of sanctions should be extended to individual directors and officers of the licensee.

Stakeholders expressed some concern that directors' rights might be infringed and that the possibility of more severe sanctions might discourage some suitable candidates from becoming directors of FMis. In response to these concerns, the Council recommends that enabling legislation, regulation and guidance articulate clearly the scope of the sanctions, delineate the circumstances in which they would be deployed, and clarify that the obligation to comply with directions and licence conditions overrides other duties owed by directors. This is consistent with international principles proposed by the Financial Stability Board, among other international bodies.

A 'fit and proper' standard for directors and officers

Relatedly, the Council considers that it would be beneficial for the efficiency, stability and integrity of the market to strengthen ASIC's power to ensure that key persons involved directly or indirectly in the management of the affairs of FMis meet a 'fit and proper' standard. A similar standard is applied by the Australian Prudential Regulation Authority (APRA) in relation to ADis.

Currently, under the Corporations Act, ASIC is obliged to demonstrate that because of the unfitness of the person involved, there is a risk that the relevant licensee or applicant would breach its obligations under Chapter 7 of the Act. This additional requirement could limit the effectiveness of ASIC's supervision of directors of licensees and its consideration of applicants. The Council considers that a fit and proper standard, without the additional requirement, would therefore be more appropriate.

Step-in powers

To further enhance ASIC's and the Reserve Bank's scope to maintain financial stability, particularly in times of stress, the Council recommends that 'step-in' powers be introduced. In particular, the Council recommends that ASIC and the Reserve Bank be given the power to appoint a statutory manager, where appropriate and in consultation with the Minister, to any domestically licensed FMI (i.e. an FMI operating in Australia as its principal place of business) in certain defined circumstances. These should include circumstances such as a threat of insolvency, significant operational outage or distress, or a significant and persistent failure to comply with licence obligations or directions. Similar powers are again available to APRA in respect of ADis and the absence of a specialised resolution regime for FMis represents a gap in the current regulatory framework. Location requirements could support effective step-in in such situations.

To address concerns raised by stakeholders in consultation, the enabling legislation, regulations and published guidance should give clarity around the potential application of these powers. In particular, it should be noted that the Council envisages that ASIC and the Reserve Bank would exercise these powers only where deemed necessary to maintain the continuity of critical services and mitigate systemic risk. The Council considers that it will also be important to provide clarity as to how regulators will ensure that a manager with appropriate experience is appointed.

Systemic importance

A key consideration in regulators' decisions around the exercise of their powers is the systemic importance of an FMI.

The Council recommends that ASIC and the Reserve Bank be given responsibility for determining the systemic importance of market operators and clearing and settlement facilities, respectively, applying an approach and criteria aligned with those developed by the Committee on Payment and Settlement Systems and the Technical Committee of the International Organization of Securities Commissions (CPSS-IOSCO) in their Principles for FMis (which are currently in the process of being finalised). This approach would ensure that the basis for assessment in Australia is consistent with other jurisdictions.

Other reforms

In addition to these enhancements to powers of direction and intervention, the Council also consulted on a number of other potential reforms, spanning powers over market operators' listing rules, compensation fund arrangements for securities markets, and client account protections.

Of the additional reforms considered, the Council recommends that legislative changes be pursued in relation to listing rules and compensation fund arrangements. Further policy analysis will be undertaken on client account protections before proceeding with firm recommendations.

In the course of the review of FMI regulation, the question of competition in clearing and settlement also arose. In 2011, the Working Group engaged with the ACCC to further develop analysis on the competition aspects of clearing and settlement. This work is continuing.

Making of listing rules

The Council considered whether there is a case to reform oversight or governance of the ASX's listing rules-making function and associated consultative machinery and, if so, how that could best be achieved.

Currently, neither the Minister nor ASIC have explicit power to require a market operator to make new listing rules, even if this is deemed necessary to promote market integrity and investor confidence. Council agencies are concerned that the incentives of a systemically important Australian market operator to continue to develop and improve its listing rules could diminish in the event that it was acquired by a foreign entity. The agencies are also concerned about investor perceptions that such an acquisition would result in Australian listing standards coming under the influence and ultimate control of a foreign entity, which may be regarded as having weaker standards than the Australian market operator.

Under current arrangements, ASIC may work with market operators in Australia from time to time to make improvements to their listing rules. However, if a proposed improvement were inconsistent with the listing standards adopted by a foreign acquirer in another jurisdiction, informal dialogue between ASIC and that market operator may not be so effective.

The Council therefore recommends that ASIC be given a power to direct market operators to make listing rules with specified content. To address stakeholders' concerns about ASIC involvement in the monitoring of listing rules, enabling legislation, regulations and guidance should clarify that the directions power would be exercised only in exceptional circumstances. It would also be subject to comprehensive checks and balances; in particular, a consultation requirement and Ministerial disallowance. Primary responsibility for monitoring and enforcing listing rules would remain with market operators.

Compensation funds

The Council also considered ways to ensure that the governance around securities exchange compensation arrangements continues to be fit for purpose. The Council considers that reform to governance is desirable to strengthen perceptions of independence in such anangements.

The National Guarantee Fund (NGF) is the fidelity fund for the ASX established under the Corporations Act. It provides investor protection in relation to transactions on the ASX's equity market. The Council recommends that the governance arrangements for the NGF be reformed to allow for a more broadly representative board of directors, appointed by the Minister. Introducing a more representative and transparent governance regime to the NGF could enhance the perceived independence of the NGF and ASX, increase retail investor confidence in the funds, and ultimately raise investor participation in Australia's licensed markets.

The Council also sees merit in reviewing the scope of eligible claims for the NGF, the treatment of Financial Industry Development Account funds, and the possibility of amalgamating the NGF with other investor compensation mechanisms. The goal would be to establish consistency of coverage across the market and ensure that the best use is made of any surplus funds. The Council will consider the need for further consultation in this regard.

Together, these proposed reforms should help to ensure the robustness, resilience and effectiveness of Australia's financial market infrastructure in a rapidly changing global financial system. Should your office wish to discuss or clarify any as ects of these proposals please direct enquiries to [Redacted]

Yours sincerely,

[Signature]

Encl.

cc. Dr John Laker, Chairman, Australian Prudential Regulation Authority

Mr Greg Medcraft, Chairman, Australian Securities and Investments Commission

Dr Martin Parkinson, Secretary to the Treasury

ATTACHMENT

LIST OF SUBMISSIONS TO CONSULTATION PAPER

Public submissions

1. Australian Bankers' Association (ABA)

2. Australian Council of Super Investors (ACSI)

3. Australian Financial Markets Association (AFMA)

4. ANZ, CBA, Macquarie, NAB and Westpac

5. ASX Limited

6. Benjamin Saunders

7. Chartered Secretaries Australia (CSA)

8. Chi-X Australia

9. Chi-X Global Holdings LLC

10. CHOICE

11. GETCO

12. International Swaps and Derivatives Association (ISDA)

13. LCH.Clearnet

14. NSX

15. Ownership Matters

16. Securities Exchanges Guarantee Corporation

17. Stockbrokers' Association of Australia (SAA)

18. Yieldbroker Confidential submissions

19.[Redacted]

20.[Redacted]

21.[Redacted]

22.[Redacted]