House of Representatives

Explanatory Memorandum

Circulated By the Authority of the Minister for Human Services Minister for Financial Services, Superannuation and Corporate Law the Hon Chris Bowen Mp

General outline and financial impact

General background

The Council of Australian Governments (COAG) reached an in-principle agreement on 26 March 2008 that the Australian Government would assume responsibility for regulating mortgage credit and advice, margin loans and trustee companies.

In June 2008, the Australian Government issued the Green Paper Financial Services and Credit Reform: Improving, Simplifying and Standardising Financial Services and Credit Reform. The paper sought feedback on possible reforms to the regulation of a number of areas in the financial services sector through the Corporations Act 2001 (Corporations Act). These areas included margin loans, trustee companies and debentures.

Following on from that process, the Australian Government issued an exposure draft of a Bill setting out a number of proposed amendments relating to margin lending, trustee companies and debentures regulation. A substantial number of submissions were received and appropriate changes were made to the draft legislation following consideration of the issues raised.

The Corporations Legislation Amendment (Financial Services Modernisation) Bill 2009 (Bill) contains proposed measures on:

•

Margin lending: Margin loans are to be included as financial products for the purposes of Chapter 7 in the Corporations Act. Margin loans to date have been inconsistently regulated. Inclusion in the Corporations Act will establish an investor protection regime by ensuring that providers of financial services in relation to margin loans will be subject to the licensing, conduct and disclosure requirements in Chapter 7 as well as supervision and enforcement action by the Australian Securities and Investments Commission (ASIC). In addition two key new measures are being introduced to address specific investor protection issues arising for margin loans:

-

a new responsible lending requirement, prescribing that margin loan lenders must make an assessment of whether a proposed loan will be unsuitable for a client, and to not make the loan if it is found to be unsuitable; and

-

a provision regulating the notification of margin calls to clients, especially where the loan has been arranged through a financial planner.

•

Trustee companies: A new chapter (5D) is to be inserted into the Corporations Act to transfer regulation of trustee companies from the States and Territories to the Commonwealth. These changes will harmonise the regulation of trustee companies, thereby reducing the regulatory burden on these companies while creating a national market for trustee services. The new chapter will also protect consumers by establishing a national consumer protection and disclosure regime under the Corporations Act and the Australian Securities and Investments Commission Act 2001 (ASIC Act). The new legislation will:

-

authorise certain corporations to operate as trustee companies and require them to hold an Australian financial services licence (AFSL);

-

deem 'traditional trustee company services' to be 'financial services' for the purposes of the Corporations Act;

-

provide that ASIC will regulate trustee companies in the provision of these traditional services;

-

apply the consumer protection (licensing, conduct, disclosure, advice and dispute resolution) provisions of the Corporations Act and the ASIC Act, as modified;

-

regulate the fees that trustee companies may charge, and how those fees are disclosed; and

-

prohibit a company that is not a trustee company from providing traditional trustee company services.

•

Debentures regulation: Amendments are proposed relating to the harmonisation of the regulation of debentures and promissory notes, and the creation of a debentures trustee register. The two proposed changes are as follows:

-

a promissory note with a face value of at least $50,000 will now be included under the definition of a debenture. This measure should assist in ensuring that there are no further attempts to avoid the operation of the law in relation to the issue of promissory notes; and

-

the creation of a publicly available register of trustees for debenture holders.

•

Technical amendment: It is proposed to correct an omission in subsection 1338B(8) of the Corporations Act relating to the jurisdiction of State and Territory courts with respect to certain offences.

Dates of effect:

Margin loans - The amendments take effect on a day to be fixed by Proclamation or the expiry of the period of six months beginning on the day on which the Bill receives Royal Assent, whichever is the earlier.

Trustee companies - The amendments take effect on a day to be fixed by Proclamation or the expiry of the period of six months beginning on the day on which the Bill receives Royal Assent, whichever is the earlier.

Debentures - The amendment relating to the harmonisation of the regulation of promissory notes takes effect on the day Royal Assent is received. The amendments relating to the establishment of the register of debenture trustees take effect on a day to be fixed by Proclamation or the expiry of the period of six months beginning on the day on which the Bill receives Royal Assent, whichever is the earlier.

Technical amendment - The amendment takes effect on the day Royal Assent is received.

Financial impacts:

Margin loans - The Government has provided $70.2 million over four years to implement the decision of the COAG to transfer responsibility for regulating consumer credit to the Commonwealth as part of the 2008-09 Mid-year Economic and Fiscal Outlook (MYEFO). This Bill includes measures to give effect to part of that transfer relating to the regulation of margin loans.

The funding will support the establishment of a national licensing regime applying to all credit providers, advisers and brokers with ASIC as the sole regulator. It will also support the national regulation of mortgages, margin lending, personal and business loans, credit cards and payday lending. The funding will be partially offset by revenue raised from fees required to be paid by persons under the national regulatory framework, including licensing fees, commencing from 2009-10. The revenue generated from licensing fees will depend on the number and type of the persons seeking registration.

Trustee companies - The financial impact is expected to be absorbed in ASIC's current budget.

Debentures - Has no significant impact on Commonwealth expenditure or revenue.

Technical amendment - Nil.

Compliance cost impacts:

Margin loans - Low to medium - these measures will create additional compliance costs for margin loan lenders and advisers, as they will be required to obtain a licence from ASIC and comply with a range of conduct and disclosure requirements.

Trustee companies - Low to medium - while there will be compliance costs associated with a client protection regime, for example, requirements for reporting and dispute resolution, these would be relatively minimal.

Debentures - These measures affect only a small number of businesses and have a low cost impact.

Technical amendment - Nil.

Summary of regulation impact statement

Regulation impact on business

Margin loans:

Impact: This measure affects financial services providers offering and advising on margin loans as their services become subject to a comprehensive range of licensing, conduct and disclosure requirements.

Main points:

•

Persons providing and advising on margin loans will be required to obtain an AFSL. They will be subject to supervision and enforcement by ASIC.

•

Such persons will become subject to the requirements imposed on AFSL holders in Chapter 7 of the Corporations Act. These requirements include, among other things, obligations to put appropriate compensation and dispute resolution arrangements in place, provide prescribed disclosure documents to their clients and observe a range of conduct requirements.

•

Consumers are the main beneficiaries of the amendments introduced in the Bill. They will benefit from the requirements for AFSL holders to be properly trained and resourced, access to free dispute resolution services, targeted and regulated disclosure documents, the responsible lending provisions and other protections in the new margin loan regulatory regime.

Trustee companies:

Impact: This measure affects companies offering traditional trustee company services, as they will be subject to a range of licensing, conduct and disclosure requirements (however, such companies already hold AFSLs covering other services). They will also be subject to internal and external dispute resolution mechanisms and compensation arrangements.

Main points:

•

Trustee companies will benefit from a single licensing regime with transparency and objective criteria. Directors will be relieved of personal liability obligations, except in the limited circumstances prescribed by the Corporations Act.

•

Trustee companies will be subject to a 15 per cent limit on individual voting power and, in cases of loss of licence, may be subject to compulsory transfer of their assets and liabilities.

•

Consumers will benefit from greater fee disclosure, a uniform fee regulation regime and low cost dispute resolution.

Debentures:

Impact: The impact of the harmonisation measure is expected to be low as the number of businesses affected by the change is understood to be relatively small.

Main points:

•

It is expected that only a small number of businesses will be affected by the change.

•

The major cost will be for trustee arrangements to be established for issues falling within the new definition, but these costs are not expected to be high.

•

Only one party responded in the consultation period, and that party supported the change.

Technical amendment

Impact: None.