Explanatory Memorandum
(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)20 Other consequential and miscellaneous amendments
ASIC Act
Bodies established under the ASIC Act
20.1 The Companies and Securities Advisory Committee (CASAC) will be renamed as the Corporations and Markets Advisory Committee (CAMAC). This reflects the wider subject matter that this body will be dealing with under the new regime. Similarly, the Parliamentary Joint Committee on Corporations and Securities will be renamed as the Parliamentary Joint Committee on Corporations and Financial Services so as to better reflect the ambit of the proposed Corporations Act as amended by the FSR Bill.
20.2 Amendments will be made to the criteria for appointments to ASIC, CAMAC and the Takeovers Panel (Items 16, 102, 130 and 131 of Schedule 1, Part 2) so that financial products and services are specifically mentioned. These changes also reflect the extended ambit of the Corporations legislation proposed under the Bill.
20.3 The application of the ASIC Act to external territories will be amended (Item 6 of Schedule 1, Part 2) to allow for the ASIC Act to apply to external territories only in specified circumstances and only in relation to certain provisions. This reflects the amendments to the proposed Corporations Act that allow for the flexible application of proposed Chapter 7 to external territories (discussed below at paragraphs 20.24 and 20.25).
20.4 Where an expression has different meanings in different provisions of the Corporations Act, the meaning for the purposes of Chapter 7 will by default be the meaning of that expression in the ASIC Act (Item 15 of Schedule 1, Part 2).
Consumer Protection in relation to financial products and services - Division 2 of Part 2
20.5 It is proposed that Division 2 of Part 2 will be amended to take into account changes being made to provisions of the proposed Corporations Act. This involves amending the scope of the application of the Division. Exclusions relating to dealing in securities will be amended and revised definitions of financial products and services will be inserted. The new definitions (subject to comments below) reflect the definitions of these terms in proposed Chapter 7.
Application of provisions to dealings in securities
20.6 It is proposed to extend the coverage of the consumer protection provisions contained in section 12DA, section 12DB and Section 12DD of the proposed ASIC Act to certain dealings in securities. Under the current regime, these three sections do not apply in relation to dealings in securities. The purpose of these limitations is to ensure that dealings in securities are subject to the specific Corporations Law liability regimes governing takeover and fundraising documents.
20.7 It is proposed that these sections of the proposed ASIC Act will apply in relation to dealings in securities in line with proposed subsection 1041K, which will replace section 995A of the proposed Corporations Act. The limitations in sections 12DA and 12DB will be narrowed so that these sections apply to dealings in securities (as defined in Chapter 7) except in relation to conduct that contravenes specific liability regimes contained in section 670A, section 728 and Parts 7.7 and 7.9 of the proposed Corporations Act (Items 21 and 22 of Schedule 1, Part 2).
20.8 It is proposed that subsection 12DD(2) will be amended to clarify that the meaning of securities in that provision is the meaning for the purposes of Chapter 6D of the Corporations Act. This provision has otherwise not been changed, as this exclusion is relevant to takeovers, which apply only in relation to securities (Item 24 of Schedule 1, Part 2).
20.9 It is proposed that section 12DC will be amended to apply in relation to financial products that involve interests in land (it currently only applies in relation to securities). A similar amendment is proposed for section 12DK (Items 23, 25 and 26 of Schedule 1, Part 2).
20.10 It is proposed that Subdivision F of Division 2 of Part 2 will be repealed. Proposed section 1101A in Chapter 7 will perform an equivalent function in the future (Item 27 of Schedule 1, Part 2).
Revised Definition of Financial Product
20.11 Proposed section 12BAA is based on the approach adopted in Division 3 of Part 7.1 of the proposed new Chapter 7 of the Corporations Act (Items 18 and 20 of Schedule 1, Part 2). However the definition of financial product for the purposes of Division 2 of Part 2 of the ASIC Act will be wider than that contained in Chapter 7 of the Corporations Act. This approach is intended to ensure that ASIC rather than the Australian Competition and Consumer Commission (ACCC) has broad responsibility for consumer protection in relation to financial products. It is also intended to ensure that ASICs consumer protection provisions will apply to financial products that may not be subject to the new licensing, disclosure and conduct framework proposed in Chapter 7 of the proposed Corporations Act.
20.12 A financial product is defined as a facility through which a person makes a financial investment, manages financial risk or makes non-cash payments. The definition of when a person makes a non-cash payment for the purposes of Division 2 of Part 2 of the ASIC Act includes the types of payments that are excluded by proposed subsection 763D(2) of the proposed Corporations Act.
20.13 The list of specific inclusions is broader than that contained in the proposed section 764A of the proposed Corporations Act. It includes all contracts of insurance (other than health insurance provided as part of a health insurance business), all life policies or sinking funds that are not contracts of insurance, all beneficial interests in superannuation funds and all foreign exchange contracts, including contracts to exchange one currency for another that are to be settled immediately through the physical delivery of notes and/or coins in the second currency. This ensures that pure money changing will be subject to the consumer protection provisions of the ASIC Act.
20.14 The list of specific exclusions is narrower than that contained in the proposed section 765A of the Corporations Act. Health insurance provided as part of a health insurance business is specifically excluded from the definition of a financial product. This will ensure that health insurance is regulated by the ACCC rather than ASIC.
Revised Definition of Financial Service
20.15 The Bill inserts a new definition of financial service in place of the definition currently contained in subsection 12BA(1) (Items 19 and 20 of Schedule 1, Part 2). The current definition states that a financial service means a service that consists of providing a financial product; or is otherwise supplied in relation to a financial product.
20.16 Proposed section 12BAB follows the model adopted in Division 4 of Part 7.1 of proposed Chapter 7. It states that a person provides a financial service if they: provide financial product advice; deal in a financial product; make a market for a financial product; operate a registered scheme; provide a custodial or depository service; operate a financial market or clearing and settlement facility; or provide a service that is otherwise supplied in relation to a financial product. A financial product is defined in proposed new section 12BAA. The regulations will be able to modify this definition by prescribing other conduct that constitutes the provision of a financial service for the purposes of Division 2 of Part 2 of the ASIC Act.
Investigations and information-gathering - Part 3
20.17 It is proposed that the ambit of Part 3 of the ASIC Act will be amended in line with the proposed Chapter 7, so provisions that currently apply to securities and futures contracts will apply in relation to all financial products. This will ensure that ASICs investigation powers apply to all financial products that will be regulated under proposed Chapter 7.
20.18 Other changes in terminology are also reflected in the proposed amendments to Part 3. For example, references to securities exchange will be amended to financial market or clearing and settlement facility (for example, items 36, 37 and 40 of Schedule 1, Part 2), while references to a dealer or investment adviser will be generalised to include anyone carrying on a financial services business (for example, items 38, 44 and 52 of Schedule 1, Part 2).
20.19 Where securities and futures contracts are currently dealt with in separate provisions (for example, sections 31 and 32 of the proposed ASIC Act), the provision relating to futures contracts will be omitted and the one dealing with securities will be amended to cover all financial products (Items 38-39, 41-43 and 45-46 of Schedule 1, Part 2).
20.20 A similar approach will be adopted in relation to sections 41, 43, 44 and 46 (Items 52 to 74 of Schedule 1, Part 2). For sections 73 and 74, the effect of current subsection 74(2) (which ensures that certain rights of futures exchanges and relevant clearing houses are not affected by an order under current subsection 74(1)) will be preserved through the proposed insertion of a new subsection 73(2) (Item 78 of Schedule 1, Part 2).
20.21 It is proposed to amend section 127 of the proposed ASIC Act to increase flexibility by providing that in future the details of situations under other Acts in which disclosure of information is permitted can be set out in regulations. Subsections 127(1B) to (1E) will be omitted (Item 86 of Schedule 1, Part 2) and these situations will be provided for by regulation in the future (Item 91 of Schedule 1, Part 2).
Restrictions on dealings in futures contracts - Division 3 of Part 7
20.22 The proposed amendments to the prohibition on insider trading in proposed Part 7.10 of the proposed Corporations Act will increase the ambit of the prohibition so that it will cover all financial products that are traded on a financial market. This means that the specific prohibition on dealing in futures contracts in Division 3 of Part 7 of the ASIC Act that applied to people who had gained information as a result of being a member or staff member of ASIC is no longer necessary and will be omitted (Item 94 of Schedule 1, Part 2).
20.23 It is proposed that section 243D, which provides that despite certain provisions of the Financial Transactions Reporting Act 1988 certain information may be communicated to a range of people, will be amended to reflect changes in terminology and concepts in Chapter 7 (Item 135 of Schedule 1, Part 2). The amended provision will allow the passing of information to market and clearing and settlement facility licensees and operators of exempt markets and clearing and settlement facilities as well as in accordance with any relevant conditions on such licenses or exemptions.
Corporations Act
Application to External Territories
20.24 The application of the Corporations Act to external territories will be amended (see proposed amendments to section 5 in Items 139-142 of Schedule 1, Part 2) so that, in relation to proposed Chapter 7, regulations will be able to provide that in certain circumstances specified provisions of Chapter 7 will apply to an external territory. The territory will then be in this jurisdiction for the purposes of the Corporations Act. This will extend to parts of Chapters 1 and 9 that apply in relation to those provisions.
20.25 This flexible application is necessary to ensure that the current framework governing the regulation of certain financial products and services in external territories can be continued under the proposed Chapter 7 without having to apply the entire regime to external territories.
20.26 It is proposed that subsections 5(3) to 5(6) will be amended (Item 140 of Schedule 1, Part 2) to simplify the provisions relating to the application of the proposed Corporations Act to acts and omissions outside of this jurisdiction. As proposed Chapter 7 contains provisions specifically dealing with when the provisions of the Chapter apply to acts and omissions outside of this jurisdiction (in contrast to the current Chapters 7 and 8, which do not contain such provisions), it will be possible to simply state that each provision of the Act applies in this jurisdiction and in relation to acts and omissions outside this jurisdiction according to its tenor.
20.27 It is proposed that the application of Chapter 7 to the Crown in a particular capacity will be able to be determined by regulation (Item 143 of Schedule 1, Part 2). Due to the very wide application of proposed Chapter 7 and the rapid rate of change in the financial services industry, it is preferable to do this by regulation rather than in the Act itself in order to provide the necessary flexibility to ensure that the Crown is bound in appropriate circumstances. Regulations binding the Crown in a capacity other than the Commonwealth will, however, only be made at the request or with the concurrence of the relevant State or Territory.
20.28 It is also proposed to amend subsection 5A(5) of the proposed Corporations Act to clarify that nothing in the Act makes the Crown liable to a pecuniary penalty (Item 144 of Schedule 1, Part 2). This is consistent to the approach already taken in relation to offences.
20.29 A large number of definitions and related provisions in Chapter 1 are currently required only because of existing Chapters 7 and 8. The proposed repeal of these Chapters means that these definitions are no longer required and they will be omitted.
20.30 A number of new definitions are required for proposed Chapter 7. These are generally contained in proposed Part 7.1 (see particularly proposed section 761A). Where these definitions are required outside Chapter 7, it is proposed to insert references to them in section 9 stating that they have the same meaning outside Chapter 7 as in Chapter 7.
20.31 In addition, a number of existing definitions will require amendment due to changes in terminology.
20.32 It is proposed that a concept of a prescribed financial market (Item 259 of Schedule 1, Part 2) will be introduced to allow for the selective application of some provisions in the Corporations Act to certain financial markets. The most significant example of the proposed use of this concept is in the definition of listed (Item 239 of Schedule 1, Part 2) which will be amended so that a company, for example, will only be regarded as listed if it is included in the official list of a prescribed financial market. This mechanism is necessary to ensure that provisions dealing with listed companies and other bodies to not apply inappropriately to bodies that might otherwise be listed.
20.33 The definition of relevant financial market will be similarly amended so that it only covers prescribed financial markets on which the company or scheme is listed. An analogous definition of relevant market operator will be also be used to refer to the operator of any prescribed financial market on which the company or scheme is listed (Items 270 and 271 of Schedule 1, Part 2).
20.34 Generally, references to securities exchanges in the proposed Corporations Act will be amended to refer to prescribed financial markets or their operators, as appropriate.
20.35 Paragraph 323DA(1)(c) will be amended (Item 355 of Schedule 1, Part 2) to clarify that markets prescribed for the purposes of this paragraph are different to the concept of a prescribed financial market as used elsewhere in the Act.
20.36 A number of provisions in the Corporations Law currently only apply to bodies included in the official list of the Australian Securities Exchange. The equivalent provisions in the proposed Corporations Act will be amended so that they apply to bodies that are included in the official list of a prescribed financial market. This is consistent with the approach of omitting specific references to the Australian Stock Exchange. The proposed mechanism for prescribing certain financial markets will provide sufficient flexibility to ensure that these provisions have appropriate coverage. These amendments are located in Items 341-347, 352, 354, 356 of Schedule 1, Part 2.
20.37 The current definitions of securities in section 92 of the proposed Corporations Act will generally continue to apply. References relating to the current Chapter 7 in subsection 92(1) of the proposed Corporations Act will be omitted (paragraphs 92(1)(ca) and (e)). However this definition will continue to apply outside of Chapters 6, 6A, 6B, 6C, 6CA, 6D and 7. Similarly, paragraph 92(2)(ca) and subsection 92(2A) are no longer relevant as they relate to the current Chapter 7 and will be omitted.
20.38 The subsection 92(3) definition will be amended to apply in relation to Chapters 6, 6A, 6B, 6C and 6CA. The definition of security in proposed section 761A will apply to Chapter 6D and proposed Chapter 7.
20.39 As a result of this change in the definition of securities for the purpose of Chapter 6D, disclosure for managed investment products will occur under proposed Part 7.9. Therefore, it is proposed to make consequential amendments to remove references to managed investment schemes from Chapter 6D (Items 410, 414, 423 and 427 of Schedule 1, Part 2).
20.40 In subsections 92(1), (2) and (3), the exclusion of futures contracts will be omitted (as the concept will no longer exist) and will be replaced by an exclusion for derivatives. Options to acquire securities by way of transfer will, however, not be excluded. It is unnecessary to state that options to acquire securities by way of issue are not excluded as they are not included in the definition of derivative (see discussion relating to definition of derivative at paragraphs 6.72 and 6.73 and the note to proposed subsection 92(1)).
20.41 The relevant amendments are in Items 315-327 of Schedule 1, Part 2.
Other Consequential Amendments
20.42 References in Chapter 6 of the proposed Corporations Act to the provision of financial services will be omitted and replaced by the expression the provision of financial accommodation by any means. This will retain the current effect of these provisions while removing any possible confusion that could otherwise arise from the use of financial services in a context where it is not intended to refer to the meaning of this expression in proposed Chapter 7 (Items 363 and 369 of Schedule 1, Part 2).
20.43 Chapter 6 of the Corporations Law contains a number of provisions that refer to the SCH business rules and SCH sub-register. In accordance with the changes being made by the Bill, these references will be omitted from the equivalent provisions in the proposed Corporations Act and regulation making powers will be provided instead (Items 390-392, 395, 396 and 398 of Schedule 1, Part 2).
Amendments related to previous changes to the Corporations Law
20.44 Part 1 of Schedule 3 contains proposed amendments to the proposed Corporations Act to remove a number of current anomalies in the Corporations Law that resulted from amendments made by the Managed Investments Act 1998 and the CLERP Act.
20.45 It is proposed to omit the definition of associate in section 9 of proposed Corporations Act (that was inserted into the Corporations Law by the CLERP Act) and in section 12 (which is redundant following the CLERP Act reforms). A replacement definition of associate will be inserted in place of the section 12 definition (Item 15 of Schedule 3, Part 1).
20.46 This new definition will clarify that the narrower meaning of the term associate as currently defined in section 9 will apply to all instances of associate in Chapters 6, 6A, 6B and 6C. Under the current arrangements, it is not always clear when the narrower definition of associate should be used and when the ordinary definition should apply. References to section 12 in section 13 of the proposed Corporations Act will be omitted (Item 16 of Schedule 3, Part 1).
20.47 In addition, it is proposed that the exemptions in section 16 should also apply to the proposed definition in section 12. These exemptions do not currently apply to the section 9 definition.
20.48 Proposed subsection 12(2) will also clarify that where associate is used in another definition (such as the definition of substantial holding in section 9), and that other definition is used in a provision in Chapters 6 to 6C, then associate has the narrower section 12 meaning.
Definition of continuously quoted securities
20.49 It is proposed to replace paragraph (b) of the definition of continuously quoted securities in section 9 of the proposed Corporations Act (Item 9 of Schedule 3, Part 1). The purpose of the new paragraph (b) is to ensure that the securities of an entity that is covered by an order under section 340 or 341 of the proposed Corporations Act (that allows ASIC to make orders exempting directors, companies, schemes, entities or auditors from the provisions of the Act governing financial reports and audit) does not fall within the definition of continuously quoted securities for the purposes of the fundraising provisions contained in Chapter 6D. This will ensure that entities that have been exempted from the Acts requirements relating to financial reports and audit do not benefit from the reduced disclosure obligations that are available under Chapter 6D in relation to continuously quoted securities.
Definition of qualified accountant
20.50 It is proposed to amend the definition of qualified accountant in section 9 of the proposed Corporations Act (Items 12 and 17 of Schedule 3, Part 1). The definition currently refers to a member of a professional body that has been approved by ASIC in writing for the purposes of this definition.
20.51 The purpose of the amendment is to refine ASICs powers so that it can declare in writing that either all members of a specified professional body, or that only persons in a specified class of members of a specified professional body, are qualified accountants. It will also clarify ASICs power to revoke such a declaration. Proposed subsection 88B(4) will ensure that existing approvals will remain in place as if they were approvals under the new arrangements.
Definition of substantial holding
20.52 It is proposed to amend the definition of substantial holding contained in section 9 of the proposed Corporations Act to replace takeover period with bid period (Item 14 of Schedule 3, Part 1). This change is necessary, as the term takeover period is not defined in the Act.
Off-market takeover bids - consideration offered
20.53 Subsection 650B(1) of the proposed Corporations Act allows a bidder to vary offers made under an off-market bid by improving the consideration offered. Subsection 650B(2) states that a target shareholder that has already accepted an offer is entitled to receive the improved consideration immediately (or immediately after the exercise of a fresh election where the improvement consists of adding a new form of consideration or any other improvement not listed in items 1 to 3 of subsection 650B(2)).
20.54 It is proposed to amend subsection 650B(2) of the proposed Corporations Act to ensure that the bidder will not become liable to pay or provide consideration under the bid earlier than would otherwise be the case as a result of improving the consideration offered under the bid (Item 22 of Schedule 3, Part 1).
General compulsory acquisitions and buy-outs
20.55 Part 6A.2 of the proposed Corporations Act sets out provisions governing compulsory acquisition of outstanding classes of securities by a 90 per cent holder (in circumstances other than following a successful takeover bid). Section 664B currently stipulates that a 90 per cent holder may only acquire outstanding securities in the class for a cash sum and must pay the same amount for each security in the class acquired.
20.56 Section 664B of the current Corporations Law will be amended to enable a 90 per cent holder to pay different amounts where these differences are attributable to either differences in the accrued dividend or distribution entitlement of the securities of differences in the amounts paid up or remaining unpaid on the securities (Items 24 and 25 of Schedule 3, Part 1). The purpose of the amendment is to ensure that consideration paid for outstanding securities can be appropriately varied to reflect variations in the value of different securities within the class.
Obligations in relation to preparation of expert reports
20.57 Subsections 670C(2) and 670C(3) of the existing Corporations Law require experts whose reports accompany or are included in takeover or compulsory acquisition documents to notify the issuer of the document in writing as soon as practicable if they become aware of a defect in the report (either a material statement that is misleading or deceptive or a significant change affecting information included in the report) during the takeover period. However, the term takeover period is no longer defined in the Corporations Law. It is therefore proposed to replace takeover period with bid period or objection period in subsections 670C(2) and 670C(3) of the proposed Corporations Act (Item 26 of Schedule 3, Part 1).
Fundraising - offers that do not need disclosure
20.58 Section 708 of the Corporations Law lists various types of offers of securities that do not require disclosure under Chapter 6D. This section is intended to apply to all bodies. However it currently includes some references to company. It is therefore proposed to replace references to company in paragraph 708(13)(a) of the proposed Corporations Act with references to body (Item 27 of Schedule 3, Part 1).
Renaming of Corporations and Securities Panel
20.59 The Corporations and Securities Panel will be renamed as the Takeovers Panel. The role of the Panel is to provide a mechanism for the peer review of takeover activity, with the aim of being more expeditious and less formal than the courts. The role of the Panel was reformed under the CLERP Act.
20.60 The name Takeovers Panel will more accurately reflect the role and nature of the Panels work. Therefore, it is proposed that amendments will be made to references to the Corporations and Securities Panel in both the proposed Corporations Act and ASIC Act (Items 1-4, 11, 20 and 23 of Schedule 3, Part 1).
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