Senate

Revised Explanatory Memorandum

(Circulated by the authority of the Minister for Financial Services and Superannuation, the Hon Bill Shorten MP)

Chapter 4 - Dual regulated entities

Outline of chapter

4.1 Schedule 1 to this Bill amends the Corporations Act 2001 (Corporations Act) to apply requirements for adequate resources and risk management systems to RSE licensees that also manage non-superannuation registered managed investment schemes.

4.2 All references in this chapter are to the Corporations Act unless otherwise specified.

Context of amendments

4.3 Some RSE licensees, in addition to managing RSEs, are also the responsible entities of one or more non-superannuation registered managed investment schemes.

4.4 In addition to complying with the SIS Act and SIS Regulations, these entities are also required to hold an Australian Financial Services Licence issued by ASIC. As a result, these entities are regulated by both APRA and ASIC.

4.5 The holders of financial services licences must comply with a range of general obligations, set out in section 912A of the Corporations Act. These include obligations to have available adequate resources (including financial, technological and human resources) and to have adequate risk management systems. These requirements are set out in paragraphs 912A(1)(d) and (h) respectively.

4.6 Currently, bodies regulated by APRA, including RSE licensees, are exempt from the requirements set out in paragraphs 912A(1)(d) and (h). RSE licensees are required to satisfy risk management requirements and requirements for adequate resources (human, technological and financial) imposed under the SIS Act and SIS Regulations. These requirements are not, however, designed to ensure that adequate resources or risk management systems are maintained in respect of the non-superannuation business of RSE licensees that also manage registered managed investment schemes. In particular, the Review recommended (recommendation 6.1(e)) that dual regulated entities meet Corporations Act financial resource requirements.

4.7 To address this gap in regulatory coverage, the Corporations Act will be amended so that RSE licensees that also manage non-superannuation registered managed investment schemes must comply with Corporations Act requirements to have available adequate resources and have adequate risk management systems. For these entities, the requirement to have adequate risk management systems will not include risks that relate solely to the operation of an RSE by the entity.

Summary of new law

4.8 The Bill requires RSE licensees that are also responsible entities of registered managed investment schemes to comply with Corporations Act requirements on adequate resources and risk management systems.

Comparison of key features of new law and current law

Detailed explanation of new law

Requirement to have adequate resources

4.9 Existing paragraph 912A(1)(d) requires financial services licensees (which include the responsible entities of non-superannuation registered managed investment schemes) to have adequate resources (including financial, technological and human resources), unless they are a body regulated by APRA.

4.10 The effect of the exemption for APRA-regulated bodies is that an RSE licensee which also manages one or more non-superannuation registered managed investment schemes only has to satisfy requirements for adequate resources (human, technological and financial) imposed under the SIS Act and SIS Regulations. These requirements are not designed to ensure that adequate resources are maintained in respect of the non-superannuation business of the entity that is the RSE licensee. Removing the exemption from the Corporations Act adequate resources requirement for these entities will address this regulatory gap. [Schedule 1, item 4, paragraph 912A(1)(d) and item 6, subsections 912A(4) and (6)]

Requirement to have adequate risk management systems

4.11 Existing paragraph 912A(1)(h) requires financial services licensees to have adequate risk management systems, unless they are a body regulated by APRA. An RSE licensee which also manages registered managed investment schemes only has to satisfy risk management requirements imposed under the SIS Act. As above, these requirements are focused on the risks relating to the RSE business and do not fully capture risks relating to the non-superannuation business of the entity that is the RSE licensee. Amending the Corporations Act to require these entities to have adequate systems for managing their risks, except for those that relate solely to the operation of an RSE by these entities will address this regulatory gap. [Schedule 1, item 5, paragraph 912A(1)(h) and item 6, subsections 912A(5) and (6)]

4.12 The Bill does not alter the arrangements for APRA-regulated bodies other than RSE licensees that are also responsible entities of registered managed investment schemes.

Application and transitional provisions

4.13 The obligations to comply with Corporations Act requirements for adequate resources and risk management systems will begin on 1 July 2015.