Explanatory Statement
Issued by the authority of the Parliamentary Secretary to the TreasurerCorporations Amendment (Compensation Arrangements) Regulation 2013
Corporations Act 2001
Section 1364 of the Corporations Act 2001 (the Act) provides that the Governor-General may make regulations prescribing matters required or permitted by the Act to be prescribed, or necessary or convenient to be prescribed for carrying out or giving effect to the Act. Subsections 1200G(13) and 1200G(14) in Chapter 8 of the Act allow the Corporations Regulations 2001 (the Principal Regulations) to prescribe which authorities in a specified overseas jurisdiction are to be regarded as the equivalent of the Australian Securities and Investments Commission in Australia. Section 893A of the Act allows the Principal Regulations to omit, modify or vary the provisions in Part 7.5 of the Act.
The first measure in the Corporations Amendment (Compensation Arrangements) Regulation 2013 (the Regulation) amends the names of two New Zealand (NZ) regulators listed in the table in regulation 8.2.04 of the Principal Regulations which are no longer correct due to recent reforms to the NZ regulatory regime.
The second measure in the Regulation provides certain clarifications with respect to the operation of the compensation arrangements prescribed in Part 7.5 of the Act. Such arrangements are available to compensate investors for losses suffered due to specified breaches by their brokers of their legal or contractual obligations. Licensed market operators are required to comply with one of two compensation regimes prescribed in Divisions 3 and 4 respectively of Part 7.5 of the Act. Division 4 sets out the regulatory framework that applies to the National Guarantee Fund (the NGF), which is the fidelity fund covering the Australian Securities Exchange (the ASX) and other equity markets, whereas Division 3 applies to all other compensation arrangements.
There are circumstances where a loss incurred by an investor may be connected with both types of compensation arrangements, for example where a loss arises from a transaction that could be executed on two markets which are covered by Division 3 and 4 arrangements respectively. For example, an order to buy 100 Commonwealth Bank shares could be executed both on the ASX and Chi-X, as the latter offers trading in the main ASX-listed securities. Subsection 885D(2) of the Act originally addressed this situation by stating that, where there was an overlap, compensation arrangements prescribed in Division 4 (i.e. the NGF) applied by default.
However, this subsection is no longer in effect since it was disapplied by an amendment to the Principal Regulations in 2004 without specifying an alternative framework to replace it. The Act therefore does not provide any guidance as to which compensation arrangements should apply in circumstances where there is an overlap between Division 3 and 4 arrangements. The Regulation addresses this gap by clarifying that the original subsection 885D(2) of the Act applies where a loss arises in these circumstances.
The Regulation includes a further amendment which ensures that a person seeking compensation in such circumstances would have to first approach the NGF, but if they are unable to obtain compensation from the NGF, and provided that the loss arises in connection with a transaction completed on a market covered by its own Division 3 compensation arrangement, they would also be able to apply to that Division 3 arrangement for compensation.
Targeted consultation in relation to this issue was undertaken in March 2013 with industry peak bodies, licensed operators of financial markets and the NGF. The majority of submissions expressed support for addressing the problem and agreed that the original subsection 885D(2) provision should be reinstated. Final targeted consultation was undertaken in June 2013 without resulting in any changes to the Regulation.
Details of the Regulation are included in Attachment A .
A statement of the Regulation's compatibility with human rights is set out in Attachment B .
Under the Corporations Agreement 2002 (the Corporations Agreement), the Commonwealth must consult with the Legislative and Governance Forum for Corporations with respect to the Regulation. The Forum has been consulted. No adverse comments have been received.
The Act specifies no other conditions that need to be met before the power to make the Regulation may be exercised.
The Regulation is a legislative instrument for the purposes of the Legislative Instruments Act 2003.
The Office of Best Practice Regulation has advised (reference number 14590 with respect to the compensation arrangement changes and reference number 14641 with respect to the NZ regulator name changes) that a Regulation Impact Statement for the Regulation would not be required.
The Regulation commences on the day after it is registered.
ATTACHMENT A
Details of the Corporations Amendment (Compensation Arrangements) Regulation 2013
Section 1 - Name of Regulation
Section 1 provides that the name of the Regulation is the Corporations Amendment (Compensation Arrangements) Regulation 2013.
Section 2 - Commencement
Section 2 provides that the Regulation commences on the day after it is registered.
Section 3 - Authority
Section 3 provides that the Regulation is made under the Corporations Act 2001 (the Act).
Section 4 - Amendment of Corporations Regulations 2001
Section 4 provides that Schedule 1 amends the Corporations Regulations 2001 (the Principal Regulations).
Schedule 1 - Amendments
Item [1] - Regulation 8.2.04 (table, item 1)
Chapter 8 of the Act contains a regulatory framework for the mutual recognition of securities offers between Australia and overseas jurisdictions. Section 1200G(13) of the Act states that a home regulator for a recognised jurisdiction (in this case New Zealand) is an authority in the recognised jurisdiction whose functions are equivalent to those of the Australian Securities and Investment Commission (ASIC) and that is prescribed by the Principal Regulations as the home regulator for that jurisdiction.
Section 1200G(14) of the Act states that if there is more than one authority in a recognised jurisdiction whose functions are equivalent to those of ASIC and that is prescribed under section 1200G(13), the Principal Regulations may prescribe the matters in relation to which that authority is to be regarded as the home regulator.
A table in Regulation 8.2.04 sets out the names of certain New Zealand (NZ) regulators which are to be regarded as the NZ home regulator for purposes of certain provisions contained in Chapter 8 of the Act.
Item 1 in the table prescribes the New Zealand Registrar of Companies as the NZ regulator where people wishing to offer securities under the mutual recognition regime are required to lodge their offer documents. The function of accepting these offer documents is now performed by the Registrar of Financial Service Providers based on the New Zealand Financial Service Providers (Registration and Dispute Resolution) Act 2008.
The Regulation therefore replaces 'New Zealand Registrar of Companies' in the table with 'Registrar of Financial Service Providers of New Zealand'.
Item [2] - Regulation 8.2.04 (table, item 2)
Item 2 in the table names the regulator that oversees offer documents in NZ. This function is now performed by the Financial Markets Authority based on the NZ Financial Markets Authority Act 2011. The Regulation replaces 'New Zealand Securities Commission' in Item 2 of the table in Regulation 8.2.04 with 'Financial Markets Authority of New Zealand'.
Item [3] - Item 6 of Schedule 8C (heading)
The heading of Item 6 in Schedule 8C of the Principal Regulations is changed to reflect the amendments made by the Regulation. The existing subsection 885D(2) contained in Item 6 currently replaces the original subsection 885D(2) in the Act. Instead, it is proposed to leave original subsection 885D(2) in the Act intact and insert the later subsection 885D(2) in Schedule 8C after it as subsection 885D(2A). The later version of subsection 885D(2) clarifies which compensation arrangements should apply in circumstances where a loss is suffered on a financial market which is covered by both Division 3 and Division 4 compensation arrangements.
This achieves the outcome whereby both of these versions of subsection 885D(2) are in force, thereby covering all scenarios where there could be some doubt as to which compensation arrangements should apply for losses suffered by investors. The original subsection 885D(2) applies in circumstances where the transaction could have been executed on multiple markets with different compensation arrangements, and the later version, which now becomes subsection 885D(2A), caters for circumstances where a single market with more than one compensation arrangement is involved.
The heading of Item 6 of Schedule 8C is therefore amended to clarify that the subsection contained in that item is to be inserted after the original subsection 885D(2) in the Act.
>Item [4] - Item 6 of Schedule 8C
It is clarified that the subsection contained in Item 6 of Schedule 8C does not replace original subsection 885D(2) but is to be inserted after that subsection.
Item [5] - Item 6 of Schedule 8C
Subsection 885D(2) in Item 6 of Schedule 8C is renamed subsection 885D(2A), and it is clarified that in the circumstances set out in the subsection, i.e. where a single financial market has more than one compensation arrangement, the provisions set out in subsection 885D(2A) prevail over those contained in 885D(2).
Item [6] - At the end of item 6 of Schedule 8C
This item inserts a new subsection (2B) in Item 6 of Schedule 8C which creates an exception from the general default position contained in the original subsection 885D(2) in the Act that the Division 4 compensation arrangements (i.e. the National Guarantee Fund) apply in the case of transactions that could have been executed on multiple markets. The new subsection 2B allows an investor in this situation to also make a claim from a Division 3 compensation fund, provided the claim is connected to a transaction completed on the financial market covered by that compensation fund, and provided that the investor is unable to obtain compensation from the National Guarantee Fund.
ATTACHMENT B
Statement of Compatibility with Human Rights
Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011
Corporations Amendment (Compensation Arrangements) Regulation 2013
This Legislative Instrument 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.
Overview of the Legislative Instrument
A first provision in the Corporations Amendment (Compensation Arrangements) Regulation 2013 (the Regulation) amends the names of two NZ regulators listed in the table in regulation 8.2.04 of the Corporations Regulations 2001 which are no longer correct due to recent reforms to the NZ regulatory framework.
A second set of provisions in the Regulation provides certain clarifications with respect to the operation of the compensation arrangements prescribed in Part 7.5 of the Act. There are circumstances where a loss incurred by an investor may be connected with more than one set of compensation arrangements, for example where a loss arises from a transaction that could be executed on two markets covered by different arrangements respectively. The Corporations Act 2001 (the Act) currently does not provide any guidance on which compensation arrangements should apply in this situation. The Regulation provides clarification as to which compensation arrangement should apply for investors wishing to claim compensation for losses suffered.
The Regulation states that the default compensation fund in such circumstances is the National Guarantee Fund (the NGF), which is the main fidelity fund for the Australian Securities Exchange and other financial markets.
The Regulation includes a further amendment which ensures that a person seeking compensation in such circumstances would have to first approach the NGF, but if they are unable to obtain compensation from the NGF, and provided that the loss arises in connection with a transaction completed on a market covered by another compensation arrangement, they are also able to apply to that other arrangement for compensation.
Human rights implications
This Legislative Instrument does not engage any of the applicable rights or freedoms.
Conclusion
This Legislative Instrument is compatible with human rights as it does not raise any human rights issues.