House of Representatives

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Jim Chalmers MP)

Chapter 5: Statement of Compatibility with Human Rights

Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.

Treasury Laws Amendment (Financial Market Infrastructure and Other Measures) Bill 2024

Schedules 1-3 & 5 — Strengthening Australia's Financial Market Infrastructure regulatory framework

5.1 Schedules 1, 2 and 3 to the Bill implement recommendations of the CFR Advice to Government to strengthen Australia's financial market infrastructure.

Overview

5.2 Schedules 1, 2 and 3 to the Bill are 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.

5.3 Schedules 1, 2 and 3 to the Bill implement recommendations of CFR Advice to Government to strengthen Australia's financial market infrastructure.

5.4 Schedules 1, 2 and 3 to the Bill implement the recommendations by:

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introducing a crisis management and resolution regime through the amendments in Schedule 1;

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enhancing ASIC and the RBA's licensing, supervisory and enforcement powers in Schedule 2; and

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streamlining and adjusting roles and responsibilities between the Minister, ASIC and the RBA in Schedule 3.

Human rights implications

5.5 Consideration has been specifically given to the guidance in the Parliamentary Joint Committee on Human Rights' Guidance Note 2: Offence provisions, civil penalties and human rights and to the Attorney General's Department's Guide to Framing Commonwealth Offences, Infringement Notices and Enforcement Powers.

5.6 Schedule 1 to 3 to the Bill engage the following human rights:

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the right to a fair trial under Articles 14 and 15 of the ICCPR

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the imposition of strict liability in relation to some criminal offences;

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the right against self-incrimination under article 14(3) of the International Covenant on Civil and Political Rights (ICCPR);

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the right to work under Article 6(1) of the International Covenant on Economic, Social and Cultural Rights (ICESCR);

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the right to protection from arbitrary or unlawful interference with privacy under article 17 of the ICCPR; and

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the right to freedom of expression and to seek information under article 19(2) of the ICCPR.

Right to a fair trial

5.7 Article 14 establishes rights to due judicial process and procedural fairness. These rights apply in both civil and criminal proceedings, and in matters before both courts and tribunals.

5.8 Schedules 1 and 2 to the Bill engages these rights as they contain civil penalties and criminal offences for non-compliance, and include an evidential burden on a defendant.

Civil penalties

5.9 The civil penalty provisions in Schedules 1 to 3 may engage criminal process rights under Articles 14 and 15 of the ICCPR. Although there is a domestic law distinction between criminal and civil penalties, 'criminal' is separately defined in international human rights law. Therefore, when a provision imposes a civil penalty, it is necessary to determine whether or not the penalty amounts to a 'criminal' penalty for the purposes of Articles 14 and 15 of the ICCPR.

5.10 Schedules 1 and 2 introduce the following civil penalties:

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failure to comply with a direction (sections 794AA and 840A of the Act)

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failure to comply with conditions on a transfer determination or rules made for a transfer (sections 837E and 839K of the Act)

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a director purports to perform or exercises a function whilst under statutory management (section 834A of the Act)

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failure to comply with an financial infrastructure banning order under (subsection 853P(3) of the Act)

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non-compliance with CS facility rules that are licensed in Australia (section 826J of the Act); and

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failure to comply with a duty under an existing financial services law (section 853L of the Act).

5.11 The civil penalty provisions contained in Schedules 1 to 3 are not 'criminal' for the purposes of human rights law. While a criminal penalty is deterrent or punitive, these provisions are regulatory and disciplinary, and they aim to encourage compliance with Schedules 1 to 3. The provisions do not apply to the general public, but are limited to licensees in the financial market sector who should reasonably be aware of their obligations under the Act. Further, the imposition of these penalties are consistent with existing provisions in the Act and Banking Act 1959.

5.12 Further, the judiciary continues to have discretion to consider the seriousness of the contravention and impose a penalty that is appropriate in the circumstances. The civil courts are experienced in making civil penalty orders at appropriate levels having regard to the maximum penalty amount, taking into account a range of factors including the nature of the contravening conduct and the size of the organisation involved.

5.13 Finally, the civil penalties are for small amounts, with no sanction of imprisonment for non-payment of the penalty. Therefore, the imposition of these civil penalties is necessary and proportionate to the objective of preserving financial system stability in Australia and enables an effective disciplinary response to noncompliance.

Criminal penalties

5.14 Schedules 1 and 2 to the Bill includes criminal offences in relation to noncompliance with specific provisions. In particular, criminal offences are introduced for noncompliance with the following:

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a request for information, access to documents or the facility, or a direction from the RBA or ASIC (sections 823H, 833E, 839H, 841A, 821D, 823BB, and 823BC of the Act)

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failure of officers to take reasonable steps to ensure compliance (subsection 823W(1));

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accounting for income or other distribution received after a transfer if the income or distribution arises from assets transferred to the receiving body under Part 7.3B of the Act (section 839G of the Act);

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banning orders (section 853P of the Act);

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disclosure of information covered by a secrecy determination (section 848A, 848B or 848C of the Act).

5.15 The strong deterrent effect of criminal sanctions is necessary for natural persons involved in regulating or operating FMI entities because of the direct link to the Australian financial system and the impact on the Australian economy. The criminal penalties introduced under Part 7.3B of the Act generally replicate existing offences under the Banking Act 1959. The criminal offences under Schedule 2 to the Bill generally follow existing similar provisions in the Act. Overall, the criminal penalties introduced are designed to enable the RBA and ASIC to maintain greater oversight of the Australian financial system and ultimately protect financial system stability in Australia

5.16 The offences are modelled on the standard for all Australian criminal laws, including default elements from the Criminal Code.

5.17 Consistent with Article 14(1) of the ICCPR, an independent, impartial court will preside over all criminal proceedings brought under Schedules 1 and 2 to the Bill, which will be subject to established Australian court processes and procedures that protect the right to a fair trial including requirements relating to procedural fairness, evidence and sentencing.

5.18 Given that these offences are appropriately designed to ensure integrity of Australia's financial system and will be administered in accordance with Australia's standards for criminal law proceedings, these offences are consistent with Article 14 of the ICCPR.

Offence of strict liability

5.19 Subsection 821K(2) of the Act introduces an offence of strict liability for a person considering appointing an external administrator of a body corporate who does not provide the RBA written notice prior to the appointment of an external administrator. Strict liability is appropriate in this circumstance, as it is necessary to strongly deter misconduct that can have serious detriment for Australia's financial system stability.

5.20 Strict liability reduces noncompliance, which bolsters the integrity of the regulation of FMI entities. Strict liability is appropriate where there is a need to ensure offences are dealt with expeditiously to maintain public confidence in the regulatory regime.

5.21 The strict liability in section 821K of the Act under Schedule 1 to the Bill meets all the requirements of the Guide to Framing Commonwealth Offences as:

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the offence is not punishable by imprisonment;

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the maximum penalty is at the maximum allowable for strict liability offences (60 penalty units for individuals or 300 penalty units for a body corporate); and

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the harm to the overall financial stability is so significant that fault should not be an element of the offence.

5.22 The application of strict liability, as opposed to absolute liability, preserves the defence of honest and reasonable mistake of fact.

Evidential burden

5.23 Schedules 1 and 2 to the Bill engage Article 14(2) of the ICCPR because they impose an evidential burden on a defendant who wishes to raise a defence to offences for:

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notification of recapitalisation or restructuring (section 821H);

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complying with written approval from the statutory manager or the RBA when under statutory management (section 834A);

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complying with the conditions set out in the transfer determination (section 837E);

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disclosing information covered by a secrecy determination (sections 848C, and 848G);

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implementing a direction made by ASIC or the RBA under Part 7.3 of the Act (section 823X);

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things done, or omitted to be done, by RBA or RBA staff in good faith for the purposes of exercising, or purporting to exercise, powers conferred on them by Part 7.3B of the Act or section 823F of the Act (dealing with directions to preserve stability in the Australian financial system) (section 84A of the RB Act).

5.24 Placing an evidential burden in relation to those defences is appropriate, proportionate and reasonable. Principally, this is because in the vast majority of cases it will be peculiarly within the knowledge of the defendant how the information may have been publicly accessed, or the means by which the conduct was authorised by another law of the Commonwealth. This in turn is due to the wide range of publicly available information and circumstances in which other laws could authorise or require disclosure. Evidence establishing that disclosure was to a legal representative for the purpose of seeking legal advice or to another person as permitted by the other exceptions is also peculiarly within the defendant's knowledge and control.

5.25 Placing an evidentiary burden on the defendant is further justified because it would be significantly more difficult for the prosecution to disprove these matters than it would be for the defendant to establish these matters.

5.26 In summary, engaging the right to a fair trial in this way is necessary because it achieves the legitimate objective of ensuring that directions given by the Regulator (subject to a secrecy arrangement) are not disclosed in ways that may cause harm, and it ensures consistency of approach across relevant laws. Placing an evidentiary burden on the defendant therefore ensures that a secrecy offence is effectively prosecuted. Therefore, the provisions are consistent with the right to a fair trial under Article 14 of the ICCPR. The reversal of the burden of proof is appropriate in the circumstances as the public benefit of maintaining financial infrastructure outweighs the right to silence.

Merits review

5.27 Article 14 establishes rights to due judicial process and procedural fairness. These rights apply in both civil and criminal proceedings, and in matters before both courts and tribunals ^[1] . Schedules 1 and 2 to the Bill exempts some decisions from merits review, only to the extent they are consistent with the Administrative Review Council's publication "What Decisions Should be Subject to Merits Review? ^[2] ".

5.28 All decisions under Part 7.3B of the Act are not subject to merits review, Decisions made under the crisis regime in Part 7.3B of the Act relates to financial decisions with a significant public interest, which is an allowable exemption from merits review This is justified on the basis that the RBA, ASIC and Ministers must act effectively and efficiently to protect financial system stability in Australia.

5.29 Decisions which are legislation-like in character, and decisions which are procedural or preliminary as they precede a substantive decision, are not suitable for administrative review. Likewise, other decisions are not reviewable where the benefits of not providing administrative review outweigh the objectives of providing it. This applies to decisions of ASIC and the RBA that apply to FMI entity licensees.

5.30 Therefore, Schedules 1 and 2 to the Bill upholds and does not unreasonably limit the right to a fair trial or fair hearing with respect to administrative decisions and judicial review.

Right to work

5.31 Sections 853H, 853K, 853L and 852M of Schedule 2 to the Bill engage the right to work under Article 6 of the ICESCR. The right to work provides that everyone must be able to freely accept or choose their work and includes a right not to be unfairly deprived of work. The right to work also requires that state parties provide a system of protection guaranteeing access to employment. This right must be made available in a non-discriminatory manner pursuant to Article 2(1) of the ICESCR.

5.32 The inclusion of a fit and proper test is appropriate as it pursues the legislative objective of ensuring that persons who have been approved as a licensee in financial markets within Australia are persons who are trustworthy and have the required integrity for the role. Ensuring that only individuals that meet appropriate ethical standards can be involved the licensing of FMI entities is necessary to protect the stability of Australia's financial system.

5.33 Participation in Australia's financial markets is not a right; participation is a privilege, granted by the Commonwealth to suitable persons. A person seeking the benefit of participation in an FMI entity will do so in the knowledge that ASIC may have regard to certain matters that broadly relate to noncompliance with certain financial market obligations or managing corporations. ASIC may also consider whether a person has had any criminal convictions within the past 10 years. These factors are aimed at ensuring a person is capable of operating an FMI entity.

5.34 The inclusion of a fit and proper standard with respect to FMI entities is appropriate and does not limit the Article 6 of the ICESCR, as it is necessary to protect Australia's financial system stability.

Information gathering and sharing

5.35 The RBA's new information-gathering powers engage the right against self-incrimination under Article 14(3)(g) of the ICCPR. Sections 823H, 833E and 841A of the Act empower the statutory manager and RBA to request critical information regarding the operation of domestic CS facilities. CS facility licensees are required to provide information relating to the business of the body corporate, its property or any affairs in its possession and to enable the statutory manager to inspect and take copies of the books. In a crisis, the body corporate may be required to give a statutory manager any information relating to the body corporate's business and other property affairs and financial circumstances, which may also be shared with the RBA.

5.36 The new information gathering provisions for the RBA may engage the right to protection from unlawful or arbitrary interference with privacy under Article 17 of the ICCPR as it may require the person to share personal information related to the CS licence facility. However, the information gathering powers are balances the RBA's need to access information with a natural person's right against self-incrimination by limiting the use of incriminating material supplied by the individual. Information obtained using the powers cannot be used against the individual in criminal proceedings or in proceedings where the person may be liable to a criminal penalty of 12 months.

5.37 The right in Article 17 may be subject to permissible limitations, where these limitations are authorised by law and are not arbitrary. In order for an interference with the right to privacy to be permissible, the interference must be authorised by law, be for a reason consistent with the ICCPR and be reasonable in the particular circumstances. The UN Human Rights Committee has interpreted the requirement of 'reasonableness' to imply that any interference with privacy must be proportional to the end sought and be necessary in the circumstances of any given case.

5.38 The amendments ensure the existing information sharing arrangements between ASIC and the RBA continues in a crisis under Part 7.3B of the Act. Due to the potential appointment of an external statutory manager, it is necessary the RBA and statutory manager are able to share confidential information. The amendment is reasonable as CS facilities are coregulated by both ASIC and the RBA with each regulator requiring effective and timely information to protect the integrity of Australia's financial system.

5.39 Any information that is shared between the RBA and ASIC or the RBA and the statutory manager will be 'protected information' within the meaning of each regulator's enabling legislation, and therefore, remain subject to strict confidentiality protections. ASIC, the RBA and an external statutory manager will be subject to the requirement to take all reasonable measures to protect confidential information from any unauthorised disclosure.

5.40 Schedule 1 to the Bill engages the right to freedom of expression and to seek information under article 19(2) of the ICCPR as a result of new secrecy provisions under Division 9 of Part 7.3B of the Act that enable certain persons to disclose protected information that would otherwise be subject to a secrecy determination.

5.41 The disclosure of protected information by way of a secrecy disclosure is proportionate to the objectives of resolving a crisis by protecting the stability of the financial system in Australia.

Conclusion

5.42 Schedules 1, 2 and 3 to the Bill are compatible with human rights as to the extent human rights issues are engaged, they are necessary and proportionate to the amendments.

Treasury Laws Amendment (Financial Market Infrastructure and Other Measures) Bill 2024

Overview

5.43 Schedule 4 to the Bill 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.

5.44 Climate change is recognised internationally as presenting material risks to the global financial system – risks which need to be managed by capital markets, regulators and corporations. These include physical risks of climate change and the transition risks associated with the market, regulatory and technological changes brought on by efforts to mitigate climate change.

5.45 Improving climate-related financial disclosures will support regulators to assess and manage systemic risks to the financial system as a result of climate change and efforts taken to mitigate its effects.

5.46 This Schedule requires entities that lodge financial reports under Chapter 2M of the Corporations Act, meet certain minimum size thresholds, and/or have emissions reporting obligations under the National Greenhouse and Energy Reporting (NGER) scheme, to make disclosures relating to climate in accordance with sustainability standards made by the Australian Accounting Standards Board (AASB). The amendments phase in the new obligations over a period of four years.

5.47 Climate disclosures will be subject to similar audit and reivew requirements to those currently in the Corporations Act for financial reports and will require entities to obtain a report from their financial auditor. The extent and level of assurance required will be set out in Australian auditing standards for sustainability reports, developed by the Auditing and Assurance Standards Board (AUASB).

5.48 These amendments ensure that relevant entities disclose their climate related plans, financial risks and opportunities, in accordance with sustainability standards made by the AASB. The new requirements build on the existing financial reporting framework through inclusion of a new 'sustainability report' that is required to be prepared for certain entities.

5.49 Businesses, investors, regulators and the public will have a clear and common understanding of obligations for entities to disclose climate-related financial risks and opportunities, in line with international standards.

Human rights implications

5.50 This Schedule new strict liability offences 88which may engage the right to a fair trial, as well as the presumption of innocence in Articles 14 and 15 of the International Covenant on Civil and Political Rights (ICCPR). Article 14(2) of the ICCPR recognises that all people have the right to be presumed innocent until proven guilty according to the law. Articles 14 and 15 apply only in relation to the rights of natural persons, not legal persons, such as companies.

Strict liability offences

5.51 Strict liability offences engage with the right to be presumed innocent as they involve the imposition of criminal liability without a mental fault element. However, strict liability offences are compatible with the presumption of innocence if they are reasonable, necessary and proportionate and in pursuit of a legitimate objective.

5.52 Several new strict liability offences are added to support the new auditing and assurance requirements in the new climate reporting regime. These include penalties for not complying with the strict requirements to conduct an audit in line with relevant climate standards, not retaining audit records as required or not providing the necessary declarations in relation to auditor independence requirements or adherence to codes of professional conduct. These strict liability offences mirror similar offences relating to financial recordkeeping.

5.53 A strict liability offence is also introduced for non-compliance with a direction by ASIC an entity to correct, complete or substantiate a statement made in a sustainability report (subsection 296E(8)).

5.54 The strict liability offences in this Schedule meet all the conditions listed in the Attorney-General's Department's A Guide to Framing Commonwealth Offences, Infringement Notices and Enforcement Powers. For example, the fines for the offences do not exceed 60 penalty units for persons other than a body corporate or 300 penalty units for a body corporate.

5.55 The application of strict liability, as opposed to absolute liability, preserves the defence of honest and reasonable mistake of fact to be proved by the accused on the balance of probabilities. This defence maintains adequate checks and balances for persons who may be accused of such offences.

5.56 Strict liability is appropriate in these circumstances, as it is necessary to strongly deter misconduct that can cause serious detriment to investors and regulators relying on statements made by entities and auditors' declarations. Having strict liability apply to these offences also reduces noncompliance by ensuring that regulators can efficiently and expeditiously deal with low-level offending. This in turn bolsters the integrity of the regulatory regime enforced by the Australian Securities and Investment Commission (ASIC) and maintains public confidence in the regime.

5.57 Given the importance of setting up the new climate-related financial disclosures scheme, this approach is a reasonable and proportionate means of achieving the legitimate objective of the new scheme.

Conclusion

5.58 To the extent that Schedule 4 to the Bill may engage the right to a fair trial, and presumption of innocence under Articles 14 and 15 of the ICCPR, it 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 as the limitations are appropriate, proportionate and achieve a legitimate objective to ensure the new scheme of climate-related financial disclosures operates effectively.