House of Representatives

Explanatory Memorandum

(Circulated by the authority of the Parliamentary Secretary to the Treasurer, the Hon Chris Pearce MP)

General outline and financial impact

Overview

The Corporations Legislation Amendment (Simpler Regulatory System) Bill 2007 and supporting Bills contain a range of measures to simplify and streamline Australia's corporate and financial services laws. The package contains amendments that will:

•

implement the Australian Government's response to several recommendations made in the Rethinking Regulation report of the Taskforce on Reducing the Regulatory Burden on Business, relevant to corporate and financial services regulation;

•

amend various provisions of the Corporations Act 2001 (Corporations Act) and related Acts to improve the efficiency of corporate and financial services regulation, based on the proposals outlined in the Corporate and Financial Services Regulation Review Proposals Paper of November 2006; and

•

make various other minor and technical amendments to the Corporations Act and related Acts.

The main Bill contains nearly all of the amendments. The Corporations (Fees) Amendment Bill 2007 and the Corporations (Review Fees) Amendment Bill 2007 are supporting Bills which contain minor amendments regarding chargeable matters in support of some measures in the main Bill, and a measure to introduce a facility for up-front payment of annual review fees. Those measures are required to be in separate Bills for constitutional reasons.

Unless indicated otherwise, references in this document to a Bill are to the main Bill.

Please do not delete the following section break

1. Financial Services Regulation

The Bill will reduce the regulatory burden on providers of financial services, increase access to financial advice and make improvements to other aspects of the financial services regulatory framework. The changes include:

•

removing the need for a Statements of Advice to be provided in two circumstances: where there is no recommendation in relation to a particular financial product and no remuneration; and where the amount to which the advice relates is under the prescribed threshold;

•

refining the circumstances where a Financial Services Guide is not required to be provided, particularly at seminars;

•

introducing changes to the retail/wholesale client distinction regarding sophisticated investors and in relation to investments in pooled superannuation trusts;

•

refining the cross-endorsement provisions;

•

introducing a new 'in use' notice for Product Disclosure Statements;

•

improving the mechanism whereby the Australian Securities and Investments Commission (ASIC) takes a role in overseeing compliance with a financial market's rules where the market operator has a conflict of interest; and

•

allowing registered managed investment schemes to invest in unregistered managed investment schemes.

Date of effect: Some amendments commence on Royal Assent. Others commence on a date to be fixed by proclamation or otherwise six months after Royal Assent.

Proposal announced: The proposals were announced in the Corporate and Financial Services Regulation Review Proposals Paper of November 2006 (the Proposals Paper). Their origin is in Proposals 1.2-1.4, 1.6-1.7 and 1.9-1.12 of the Proposals Paper. These proposals have been refined in the light of comments made in response to that paper. The amendments also reflect the Government's response to Recommendation 5.17 of the Rethinking Regulation report of the Taskforce on Reducing the Regulatory Burden on Business, released in August 2006 (the Banks report).

Financial impact: Aside from some consequential changes to ASIC fees that may result in a negligible financial impact, the amendments have no financial impact.

Compliance cost impact: The amendments are expected to reduce cost burdens for a number of financial services licensees, which are expected to result in cost savings for their clients. An example is the potential cost reduction for licensees of providing advice to clients with relatively small amounts to invest, and to sophisticated investors. There are likely to be some initial costs for product issuers in moving to the new 'in use' notice but, once the electronic mechanism is implemented, the cost of using it is likely to be less than the cost of the current arrangements.

Summary of regulation impact statement

Regulation impact on business: Statement of Advice threshold and product activity and data collection

Impact: The Statement of Advice threshold measure will impact financial service providers in the provision of personal advice and consumers of financial advice. The product activity and data collection measure will primarily impact financial product issuers.

Main points:

Statement of advice threshold

•

The problem to be addressed in the Statement of Advice threshold measure is that consumers who wish to obtain financial advice in relation to a relatively small investment amount are unable to access or afford financial advice because of the relatively high cost of providing such advice.

•

The threshold proposed is linked to the point at which it becomes commercially viable for an adviser to provide advice, based on recovering the cost of preparing a Statement of Advice.

•

The result of the measure is expected to be increased consumer access to affordable financial advice, without compromising investor protection.

Product activity and data collection

•

The problem which the product activity and data collection measure seeks to address relates to the costs associated with lodging product disclosure in-use notices, compared with the regulatory benefit from ASIC receiving such notices.

•

The measure included in the Bill will improve the regulatory usefulness and efficiency of the product disclosure in-use notice system and reduce compliance burdens on business.

Please do not delete the following section break

2 Company Reporting Obligations

The Bill will simplify company reporting obligations to reduce compliance costs for companies. The changes include amendments to:

•

incorporate in the Corporations Act the accounting standards requirements for executive and director remuneration disclosure;

•

increase the thresholds used to define a large proprietary company and allow for future changes to the thresholds to be prescribed by regulations;

•

change the notification requirements, payment of annual fees and the company deregistration procedure; and

•

allow companies to make annual reports available on the internet and only require hard copies to be sent to members who request them.

Date of effect: The bulk of the changes will commence on Royal Assent. Some provisions, however, have specific application provisions. These are:

•

amendments regarding executive remuneration will apply to financial years that begin on or after commencement;

•

changes to thresholds for reporting for large proprietary companies will take effect in the financial year that ends on or after commencement;

•

changes to requirements for companies to inform ASIC when officeholders change, to provide for a company using a contact address and to provide for regulations allowing a single lump sum payment of annual review fees will commence on a date to be proclaimed, or if no date is proclaimed, six months after Royal Assent;

•

amendments regarding distribution of annual reports apply to a financial year that ends on or after commencement.

Proposal announced: The amendments regarding reporting of executive remuneration disclosures, thresholds for reporting of large proprietary companies, changes to officeholders, maintenance of company addresses, review fees associated with voluntary administration, up-front payment of annual review fees and electronic distribution of annual reports are based on proposals outlined in the Proposals Paper of November 2006. The amendments regarding executive remuneration disclosures, electronic distribution of annual reports and thresholds for reporting of large proprietary companies were announced in the Government's response to the Banks Report, released in August 2006.

Financial impact: Nil.

Compliance cost impact: The amendments are expected to reduce costs burdens for a large proportion of Australian companies. In particular, companies affected by the increase in thresholds for reporting by large proprietary companies and those that wish to take advantage of the facility to distribute annual reports electronically are likely to benefit from significant compliance cost savings.

Summary of regulation impact statement

Regulation impact on business: thresholds for reporting by large proprietary companies

Impact: This measure will affect large proprietary companies (that is, large companies that are not public companies).

Main points:

•

The increase to the threshold for financial reporting will mean approximately 1,600 fewer large proprietary companies will be required to lodge their annual reports with ASIC.

•

The main costs of the measure arise from the increased risk of direct users of accounts losing confidence in the affected companies due to a reduction in publicly available financial information. As the companies concerned are not economically significant, this is not considered to be a major concern.

Please do not delete the following section break

3. Auditor Independence

The Bill will make changes to the auditor independence provisions of the Corporations Act. The changes fall into three categories:

•

rectification of a number of anomalies and unintended consequences that have been identified during the implementation of the Corporate Law Economic Reform Program (Audit Reform and Corporate Disclosure) Act 2004 (the CLERP 9 Act);

•

incorporation into the framework of several improvements arising out of public consultations on the comparative review of Australia's auditor independence requirements; and

•

making a number of miscellaneous amendments designed to improve the effectiveness of the auditor independence requirements in the light of operational experience since the requirements were introduced by the CLERP 9 Act.

Date of effect: The provisions commence on Royal Assent. However, some provisions have specific application provisions:

•

amendments relating to the time when an auditor's independence declaration must be given apply to a report for a financial year that ends on or after commencement;

•

amendments which will give effect to a 'covered person' approach in relation to the auditor independence restrictions on financial relationships will apply to an audit of the financial report for a reporting period beginning on or after commencement;

•

the amendments which will modify the way in which the two-year 'cooling-off' period is calculated and the amendment to the multiple former audit partner restriction will apply to any person who ceases to be a member of an audit firm, a director of an audit company or a professional employee of an audit company, whether the person so ceases before or after the day on which those amendments commence; and

•

the amendments which will give ASIC the power to extend the period within which an auditor is required to resolve a conflict of interest situation will apply in relation to information given to ASIC on or after the day the amendments commence.

Proposal announced: The rectification of the anomalies identified during the implementation of the CLERP 9 Act is based on proposals appearing in the Proposals Paper of November 2006. The amendments relating to the multiple former audit firm partner restriction, the 'cooling-off' period for retiring audit partners and the introduction of a 'covered person' approach in relation to restrictions on financial relationships are based on submissions received from key stakeholders during the public consultation process on the discussion paper Australian Auditor Independence Requirements : A Comparative Review which the Government released in November 2006. The proposal to review the multiple former audit firm partner restriction was also announced in the Government's response to the Banks Report released in August 2006.

Financial impact: Nil.

Compliance cost impact: The amendments are expected to reduce compliance costs for auditors and their clients by removing some onerous regulatory requirements regarding auditor independence.

Please do not delete the following section break

4. Corporate Governance

The Bill will make amendments to the Corporations Act to remove burdensome member approval requirements in relation to small transactions between public companies and related parties. It will also allow delegation to ASIC of certain administrative functions regarding identical or unacceptable company names, and approval of changes to certain corporate constitutions. This will streamline administrative processes for corporations.

Date of effect: The amendments regarding related party transactions apply to financial years commencing on or after 1 July 2007. The amendments allowing delegation of administrative functions to ASIC will commence on 1 July 2007.

Proposal announced: The removal of member approval requirements for certain related party transactions is based on proposals appearing in the Proposals Paper of November 2006.

Financial impact: Nil.

Compliance cost impact: The amendments will reduce compliance costs for the affected corporations by removing member approval requirements and streamlining administrative processes.

Please do not delete the following section break

5. Fundraising

This Bill contains six measures to amend a number of provisions in the Corporations Act relating to fundraisings by corporate entities. The amendments are generally intended to facilitate such fundraisings by various means, including: abolishing unnecessary disclosure requirements; removing inconsistencies between different parts of the Corporations Act; or amending the time periods and amounts that can be raised under particular provisions.

Date of effect: The date of effect varies between measures. Generally the amendments will come into force either upon Royal Assent or at the latest six months after Royal Assent.

Proposal announced: The measures were first canvassed in the 'Corporate and Financial Services Regulation Review' Consultation Paper released in April 2006. The measures are based on proposals included in the Proposals Paper released by the Parliamentary Secretary to the Treasurer in November 2006.

Financial impact: Nil.

Compliance cost impact: Compliance costs were estimated for two of the measures. The impact of the measure amending the disclosure provisions applying to rights issues would constitute a significant saving compared to the costs imposed under the current framework due to the abolishment of the prospectus requirement. The measure relating to employee unlisted share schemes would result in a significant saving compared to the costs imposed under the current framework due to reduced disclosure requirements and other regulatory relief granted under the measure.

Summary of regulation impact statement

Regulation impact on business

Impact: The measure to amend the disclosure provisions applying to rights issues for quoted securities and interests in managed investment schemes will affect listed entities raising funds through a rights issue. The measure relating to employee share schemes will affect listed and unlisted entities taking advantage of the relief provided to establish and operate an employee share scheme.

Main points:

•

With respect to the measure to amend the disclosure requirements applying to rights issues, listed entities wishing to raise funds will be able to do so through a rights issue without providing a prospectus. The amended provisions require the listed entity to instead provide a notice to the market disclosing any price-sensitive information withheld from the market (as permitted under the Listing Rules) at the time the rights issue offers are made. The compliance costs relating to the provision of such a notice are much lower than those for providing a full prospectus as currently required.

•

As a result, listed entities wishing to raise funds may have an incentive to do so through a rights issue rather than some other means, such as a direct sale of securities or other financial products to institutional investors. The amendment is therefore intended to benefit mainly small shareholders, who can participate in rights issues but not in certain other forms of fundraisings such as institutional placements which are currently widely used.

•

With respect to the measure relating to employee share schemes, unlisted companies offering shares to their employees through an employee share scheme are currently subject to a range of disclosure, licensing and other restrictions imposed under the Corporations Act. The measure will remove a number of such restrictions, while still maintaining an appropriate level of investor protection for employees considering participation in such a scheme.

•

As a result, there may be more unlisted companies establishing an employee share scheme. This outcome is in accord with the Australian Government's policy of encouraging the wider use of employee share schemes, which are generally considered to provide substantial benefits to the wider economy.

Please do not delete the following section break

6. Takeovers

The Bill will repeal the provisions in the Corporations Act which relate to telephone monitoring during takeover bids and the requirements to provide section 665D and 665E notices (85 per cent notices). The repeal of those requirements will remove onerous compliance burdens for bidders and targets involved in company takeovers which are not justified by increased levels of shareholder protection.

Date of effect: The day of Royal Assent.

Proposal announced: The removal of telephone monitoring and 85 per cent notice requirements is based on proposals outlined in the Proposals Paper of November 2006. A review of the telephone monitoring requirement was announced in the Government's response to the Banks Report, released in August 2006.

Financial impact: Nil.

Compliance cost impact: The compliance cost burden for bidders and targets will be reduced by eliminating the costs associated with the telephone monitoring and 85 per cent notice requirements.

Please do not delete the following section break

7. Compliance

The Bill will amend the Corporations Act to streamline compliance procedures and ensure companies can access newer technologies. The measures include simplifying returns of company particulars and permitting electronic registration of charges.

Date of effect: The amendments permitting the electronic registration of company charges will commence on 1 July 2007. The amendments regarding returns of particulars will commence on a date to be fixed by proclamation or otherwise six months after Royal Assent.

Proposal announced: The amendments are based on proposals outlined in the Proposals Paper of November 2006.

Financial impact: Nil.

Compliance cost impact: The amendments will reduce compliance costs for the affected corporations by limiting the circumstances in which corporations must fill in and lodge a return of particulars, and by reducing paperwork connected with the registration of company charges.

Please do not delete the following section break