print post approved 255003/06151 financial services · print post approved 255003/06151 ......

financial services newsletter

Volume 6 Numbers 5

R e g u l a t i o n a n d C o m p l i a n c e Information contained in this newsletter is current as at October 2007

Print Post Approved 255003/06151

ContentsContentsA Tale of Two ’Citi’s — Is this the final leg of the conflicts journey? ....................................................58Conflicts are inherent in dealings within financial institutions, yet these dealingsare permitted by law if the institution can rely on one of three exceptions to theconflicts rules, or contract out altogether. As an investment bank, Citigroupeffectively contracted out of those rules. This article considers whether thedecision in the Citigroup case provides an answer for wealth management.Zein El Hassan CLAYTON UTZ

Bulletin board Recent developments in breach reporting ................................61The Streamlining Breach Reporting discussion paper by ASIC and APRA proposesto allow a single online report to both institutions to streamline the breachreporting process and remove duplication.Michael Vrisakis FREEHILLS

Corporations Amendment Regulations 2007 (No.12) — What’s changed? ................................................................62Discussion of key changes to the Corporations Amendment Regulations 2007(No.12) (Cth) made on 26 September 2007.Mark Radford BLAKE DAWDON WALDRON

Do you need PI Cover? ............................................................64A look at the new compensation requirements introduced by the Reg7.6.02AAA of the Corporations Regulations 2001 (Cth) on 28 June 2007, andtheir application to Australian financial services licence holders that providefinancial services to retail clients.John Bassilios and Harry New HALL AND WILCOX

Industry forumEnsure your compliance program is workable ..........................66The essential requirement for any compliance program is that it is relevant tothe licensees business. This article details what is required and how a licenseecan implement a compliance program that is reasonable and effective.Peter Cashel PARAGEM & PARTNERS PTY LTD

FSN newsCommonwealth Legislation ..........................................................................69ASIC................................................................................................................70APRA ..............................................................................................................70AUSTRAC ......................................................................................................70IFSA ..............................................................................................................71CPA Australia ..................................................................................................72Standards Australia ........................................................................................72

ContentsE d i t o r i a l B o a r d

Michael VrisakisPartner, Freehills

John MoutsopoulosPartner, Clayton Utz

Lisa SimmonsPartner, Corrs Chambers Westgarth

Stephen EtkindPartner, Minter Ellison

Mark RadfordPartner, Blake Dawson Waldron

June SmithPartner, Argyle Partnership

Harry NewPartner,

Hall & Wilcox, Melbourne

Andrea BeattyPartner,

Mallesons Stephen Jaques,Sydney

Fadi C KhouryPartner,

Deacons, Sydney

Gregory DrewBarrister,

Ninth Floor Selborne Chambers, Sydney

C o n s u l t i n g E d i t o r

Russell StewartMinter Ellison

http://www.lexisnexis.com.au


Make no mistake, conflicts areinherent in the dealings within financialinstitutions, whether they are investmentbanks or wealth managementbusinesses. Despite the conflicts, thesedealings are permitted by law if theinstitution can rely on one of threeexceptions to the conflicts rules, orcontract out altogether.

However, there are many related-partydealings which have been structuredwithout a proper appreciation of theexceptions to the conflicts rules. If youget it wrong, you may be exposed to

reputation damage, statutory penaltiesand you may also be liable to accountfor profits.

That was the potential reality facingCitigroup when the Australian Securitiesand Investments Commission (ASIC)challenged the foundations of theinvestment bank: Australian Securitiesand Investments Commission vCitigroup Global Markets Australia PtyLtd (No 4) (2007) 160 FCR 35; [2007]FCA 963; BC200704944.

Those foundations withstoodregulatory and judicial pressure, asCitigroup was able to prove that it hadcontracted out of the conflicts rulesaltogether. This article considerswhether the decision in the Citigroupcase provides an answer for wealthmanagement.

What are the conflicts rules?There is a general principle of law

that requires an account of profitswhere a fiduciary engages in certainconduct. While difficult to define, aperson is a fiduciary where the lawdetermines (using a number of differenttests) that they are required, or haveundertaken, to act on behalf of anotherperson (called a duty of loyalty).

A fiduciary will be liable to accountfor profits where:• they have placed themselves in a a

position where their duty of loyaltyconflicts with their personal interestor duty to someone else (no conflictrule); or

• they make an unauthorised profitfrom their fiduciary position (noprofit rule). For convenience, these two rules are

referred to as the ‘conflicts rules’ in thisarticle. These rules have found their wayinto a number of statutory provisions,all of which use different language and

58 ........................................................................................................................................................................................................ vol ❻ no ❺ October 2007


Main points• As an investment bank, Citigroup

argued that its contract with Tollstated that it was an independentcontractor and not a fiduciary.Accordingly, it was not subject tothe conflicts rules.

• Trustees of super funds andmanaged investment schemes arean established category of fiduciaryrelationship and cannot contractout of the conflicts rules.

• Financial planners, dealer groupsand investment managers have theoption to contract out. However,they have all undertaken to act onbehalf of their clients and will befound to be fiduciaries on the facts.If so, they will be subject to theconflicts rules.

• Even so, the law permits each ofthose regulated entities to engagein related-party dealings, providedthey can rely on one of threeexceptions to the conflicts rules.

• Now is the time to test andstrengthen your reliance on theseexceptions. If you get it wrong, yourisk reputation damage, statutorypenalties and an account of profits.

A Tale of Two ’Citi’s — Is this the final leg of theconflicts journey?

Zein El Hassan CLAYTON UTZ

have different consequences. Theprovision which found centre-stage inthe Citigroup case was the conflictsmanagement obligation for holders ofan Australian financial services licence(AFSL) under Chapter 7 of theCorporations Act 2001 (Cth).

How do investment banksmanage their conflicts?

ASIC shook the foundations of theinvestment banking community when ittook on Citigroup, a global giant, andalleged that its conflicts were managedcontrary to law. It alleged a breach ofthe AFSL conflicts managementobligation, misleading andunconscionable conduct and insidertrading under the Corporations Act.

However, all the allegations (exceptinsider trading) required a finding thatCitigroup was a fiduciary and breachedthe conflicts rules under the general law.The facts and the decision in favour ofCitigroup are as follows.

Citigroup was an investment bankwith many divisions. One of thosedivisions advised Toll Holdings on itsproposed takeover of PatrickCorporation. On the other side of itsChinese wall, another Citigroup divisionwas trading in Patrick shares for thebenefit of Citigroup.

During a break in trading, the wallwas breached and it was suggested tothe share trader that it wouldn’t lookgood for Citigroup to continue buyingPatrick shares. The trader subsequentlysold 20 per cent of those shares.

ASIC pleaded that Citigroup was afiduciary. The share trading gave rise toa conflict between Citigroup’scommercial interests in profiting fromthe share trading and its duty to act inToll’s interests in keeping the bid pricedown for the takeover. ASIC alleged thatCitigroup needed to get Toll’s fullyinformed consent (one of the exceptionsto the conflicts rules) in order to trade inPatrick shares. As it didn’t, ASICpleaded that Citigroup was in breach ofits conflicts management obligationunder its AFSL and engaged inmisleading and unconscionable conduct.

If Citigroup was a fiduciary, and ASICwas right, Citigroup would also bepotentially liable to account to Toll forthe profits made on the trading inPatrick shares. However, Toll did not

complain nor seek an account of profits.Rather, it was ASIC who took offence toCitigroup’s conduct.

Citigroup argued that its contractwith Toll stated that it was anindependent contractor, and not afiduciary. Accordingly, it was notsubject to the conflicts rules and didnot need Toll’s informed consent to theshare trading.

The court agreed with Citigroup. As ithad contracted out of being a fiduciary,the conflicts rules under the general lawand under the Corporations Act did notapply to Citigroup. The case confirmsthat investment banks can simplycontract out of the conflicts rulesaltogether. The contract is king!

Is Citigroup the answer forwealth management?

Wealth management businesses alsobreathed a sigh of relief followingCitigroup’s win. However, querywhether they can adopt the sameapproach as the investment banksregarding the conflicts rules.

The regulated entities within wealthmanagement businesses includetrustees, financial planners, dealergroups, investment managers and lifeinsurance companies. These entitieseither cannot contract out of theconflicts rules or have chosen to act onbehalf of their clients and, accordingly,are subject to the conflicts rules asfiduciaries.

Trustees are in an established categoryof fiduciary relationship and cannotcontract out of the conflicts rules. Thisapplies to trustees of super funds andmanaged investment schemes.

Financial planners and investmentmanagers are not an establishedcategory of fiduciary relationship.Accordingly, they have the option tocontract with their prospective clients asindependent contractors and not asfiduciaries, in the same way asinvestment banks deal with theircorporate advisory clients. If they takethis approach, they will not be subject tothe conflicts rules under the general law.However, financial planners andinvestment managers continue toundertake to act on behalf of theirclients and, accordingly, will be foundby the courts to be fiduciaries on thefacts and subject to the conflicts rules.

Life companies have a contractualrelationship with their policyholderswhich are subject to certain statutoryprotections, but they are not fiduciaries.However, that should give little comfort ifthe life company is dealing with anotherrelated entity that is a fiduciary, such as arelated trustee, financial planner, dealergroup or investment manager. It is acommercial reality that various forms ofremuneration are earned from services,investments and products provided bythese related entities to each other.

If one of the entities is a fiduciary,their dealing with another group entitythat derives remuneration from thedealing will be subject to the conflictsrules, and the entities will be liable toaccount for the profits arising from thedealing.

Exceptions to the conflicts rules

Even though the regulated entitieswithin wealth management businessesare subject to the conflicts rules, the lawpermits them to engage in related-partydealings and keep the resultingremuneration if they can come withinone of three available exceptions.

The first exception is that the conflictis expressly authorised by the trust deedor the contract that governs therelationship with the client. Thisexception is the foundation on whichmany products and services were builtand offered by financial institutions. Itsproper use permits related-party dealingsand resulting remuneration. Theattraction of this exception is that its usedoes not require the fully informedconsent of the client. Rather, it justrequires that the dealings are built intothe trust or contract from the start.

Examples include where trust deedslock in the use of related life companiesas life insurers and investmentmanagers. Financial planners can comewithin this exception if the contract withtheir prospective client discloses theirrelated-party dealings and expresslyauthorises their resulting remuneration.Likewise for investment managers, theIFSA template investment managementagreement expressly authorises related-party dealings and the receipt ofremuneration from them.

The second exception is that theconflict is inherent in the circumstances

(2007) 6(5) FSN ............................................................................................................................................................................................................................ 59


of appointment of the fiduciary from thestart. This exception requires a findingon the facts and may not always beavailable, depending on thecircumstances and, accordingly, is lesscertain in its application.

An example where the exception mayapply is where the trust deed confers adiscretion on the trustee, but the trustwas built from the start as aninvestment with a related-party andoffered as such to investors. Where thetrustee is appointed to such a trust, thelaw will permit it to continue to actdespite the conflict on the basis that theconflict was inherent in thecircumstances of its appointment. Thisexception is likely to be a fall-backposition for many related-party dealingswithin wealth management businesses.

The third exception is that thefiduciary has disclosed the conflict andobtained the fully informed consent ofthe client to act, despite the conflict.Given the need to obtain the consent ofall beneficiaries, this exception isimpractical for trusts with a largenumber of beneficiaries, and is rarelyrelied on by trustees. However, it mayfind some application with wholesaletrusts with a small number ofbeneficiaries.

If an exception is available, the lawpermits the fiduciary to act despite theconflict. However, it does not end therefor the fiduciary. The law still requiresthe fiduciary to properly discharge theirduty of loyalty to the client incircumstances where the conflict stillexists and may influence the fiduciary’sactions. A breach of the duty of loyaltymay give rise to a liability to the clientfor any resulting loss.

How effective is reliance on these exceptions?

If products and services are built andoffered properly in reliance on one ofthe above exceptions, they are aneffective answer to the conflicts rules.However, we have seen trusts andcontracts where the effectiveness of theirreliance on an exception is questionable.

There are trust deeds that use looseand generic language or retain someelement of discretion for the trustee,rather than locking them into using arelated party.

Some funds have replaced lock-inprovisions with wide investmentdiscretions, then invested through arelated life company, which involves aconflict. Many funds contain open-ended discretions regardingadministration and custody, and thenappoint related parties to perform thosefunctions without considering whetherthey should go out to tender or test theircontractual terms against the market.

There are contracts which are signedwell after the commencement of therelationship without any clear indicationas to the basis on which the lawsanctions the related-party dealings.

We have seen contracts that containgeneric carve-outs with little detailregarding the proposed related-partydealings and remuneration. In manycases, the disclosure about related-partydealings and remuneration is made wellafter the contract comes into existence.

It is still possible that these related-party dealings can rely on the secondimplied exception to the conflicts rules.However, it requires a particular findingon the facts and, accordingly, is lesscertain in its application.

60 ........................................................................................................................................................................................................ vol ❻ no ❺ October 2007


contr ibut ionsContributions to the Financial Services Newsletter are welcome.

Please submit notes (between 800 and 1500 words) for publication to:

EDITOR: Kerrie TarrantLexisNexis Butterworths Locked Bag 2222 Chatswood Delivery Centre NSW 2067Ph: (02) 9422 2222 Fax: (02) 9422 2404

[email protected]

Copy should preferably be presented as an email with an electronic copy of the submission attached.

mailto:[email protected]

What does this mean for the institutions?

Citigroup is not a complete answer forwealth management, as those businesseseither cannot, or have not, contractedout of the conflicts rules. Related-partydealings within these businesses are onlypermitted if you can rely on one of theexceptions to the conflicts rules. If youget it wrong, the institution is exposedto reputation damage, statutory

penalties and may be liable to accountfor the profits.

There is still a chance for a happyending to this conflicts journey. However,it requires the institutions to test andstrengthen the basis on which their wealthmanagement businesses come within theexceptions to the conflicts rules.

One noticeable absence from the currentlandscape is ASIC. It hasn’t made anycomment on conflicts for some months

now. However, it won’t be long before itre-engages with industry on its favouritetopic. In the meantime, the wealthmanagement industry has an opportunityto make sure its house is in order. ●

Zein El Hassan, Partner,Clayton Utz,<[email protected]>.


On 4 October 2007, the AustralianSecurities and Investments Commission(ASIC) and the Australian PrudentialRegulation Authority (APRA) issued adiscussion paper on a proposed onlinebreach reporting system for dual-regulated institutions. Interested partiesare invited to make submissions by 31 October 2007.

These proposals follow in the wake ofthe recent passage in Parliament of theFinancial Sector Legislation Amendment(Simplifying Regulation and Review)Bill 2007. The new regime will apply acommon platform to APRA-regulatedentities, such that those entities willneed to report significant breaches toAPRA of not only provisions of arelevant piece of legislation, but also aprudential standard, a prescribedstatutory direction, or a condition of anentity’s licence or authority.

The regime, to become effective on 1 January 2008, proceeds on the basisof certain breaches being immediatelyreportable to APRA.

These are:• breaches by a class of persons with

auditing functions — where theperson has reasonable grounds forbelieving that the company isinsolvent (or there is a significant riskthereof) or an existing or proposedstate of affairs may materially

prejudice the interests of a class ofdepositors; or

• breaches where the breach relates toa general insurer or life insurer’sfinancial obligations to policy holdersor to the insurer’s minimum capitalrequirements.Other breaches of the legislation are

subject to a materiality test — eitherthe test of significance applicable toreportable breaches under s 912D ofthe Corporations Act 2001 (Cth); or, inthe case of insurers, additionally, asignificance test where there is a matterwhich materially and adversely affectsthe insurer’s financial position.

The time period for reportingsignificant breaches under both theASIC and APRA regimes will beextended to 10 business days.

The legislation allows breachesreportable to ASIC and APRA byjointly regulated entities to be reportedto APRA only, online. This onlinereporting will not apply to breachesreferable to ASIC only. This initiative isvoluntary. The reporting obligation toASIC is also dispensed with where theAustralian financial services licenceholder is an APRA-regulated body andthe auditor or actuary provides APRAwith a written report on the breach.

The discussion paper extends theseinitiatives by:

• the proposed extension of the currentability of registrable superannuationentity licensees to report breaches toAPRA online to allow authoriseddeposit-taking institutions andinsurers to similarly report online;and

• the proposed ability of jointlyregulated entities to report breachesto ASIC and APRA simultaneouslyonline. The discussion paper contains an

attachment detailing procedures for thereporting process. There are six stepsoutlined in the attachment as follows. 1. An ABN is to be entered so that a

tailored form can be created.2. Identification details need to be

entered to verify the origin of theform.

3. The form is then to be submitted tothe nominated contact personwithin the regulated institution forverification and lodgement withAPRA.

6. An email verifying the submissionwill be sent to the contact personand once approved by that person,the form will be considered lodgedwith APRA or ASIC.

5. A further email will be sent to thecontact person acknowledgingreceipt and providing an APRAreference number.

6. Where the institution requests thatASIC be notified, APRA will sendthe relevant information to ASIC.

The online form procedures requireHTML formatted emails. Additionalmaterial can be sent in single zip file. ●

Michael Vrisakis,Partner, Freehills,<[email protected]>.

Bulle tin BOARDMichael Vrisakis FREEHILLS

FSR

Recent developments in breach reporting

(2007) 6(5) FSN ............................................................................................................................................................................................................................ 61



The Government has now releasedCorporations AmendmentRegulations 2007 (No.12) (Cth) (thenew Regulations) as part of itsfinancial services reform (FSR)simplification process. The newRegulations were registered on 28September 2007. The following setsout the key changes.

Financial services guide changes

ADI franchise exemption fromrequirement to include details of anauthorised representative’s name andcontact details in their financialservices guide (FSG) commenced on29 September 2007.

This change exempts a financialservice provider from including detailsof their name and contact details in anFSG where:

• they are:— a franchisee and a corporate

authorised representative of anAustralian financial serviceslicence (AFSL) holder franchisor;or

— an employee of a franchisee ofan AFSL holder franchisor; and

• the franchisor is an ADI regulatedby the Australian PrudentialRegulation Authority (APRA);

• the franchise agreement subjects theperson to the franchisor’s policiesand requires compliance with thepolicies made to give effect to thefranchisor’s obligations under itsAFSL; and

• the franchisor’s FSG explains thatthe franchisor takes responsibilityfor the services provided by theperson.This regulation seeks to avoid

the need to produce individualised FSGs identifying the name andcontact details of individualfranchisees that are corporateauthorised representatives, orindividual employees of franchisees of ADIs only.

It is not clear why only franchiseesof ADIs obtained this relief, as itwould have equally benefited otherfranchisor licensees.

FSG Public Forumexemption

This is applicable on a day to befixed by Proclamation, but no laterthan six months from 28 June 2007.

Section 941C of the CorporationsAct 2001 (Cth) provides that aproviding entity does not have to givea retail client an FSG if they providegeneral advice to the public, or asection of the public in a mannerprescribed by regulation.

This regulation sets out the mannerin which general advice must be given

to the public in order for this FSGexemption to apply.

The circumstances are:• providing general advice to the

public, or a section of the public, atany event organised by or forfinancial services licensees to whichretail clients are invited (giving apublic lecture or seminar for retailclients, including employees of aworkplace, is given as an example);

• a broadcast of general advice to thepublic, or a section of the public,that may be viewed or heard by anyperson (television or radio broadcastsis given as an example); and

• distributing or displayingpromotional material that bothprovides general advice to the public,or a section of the public, and isavailable in a place that is accessibleto the public (distributingpromotional material contained innewspapers and magazines is givenas an example).

Record of advice changes This is not applicable to general or

life insurance and derivatives; or tosuperannuation and retirement savingsaccount (RSA) products the clientdoesn’t hold an interest in. Commencedon 29 September 2007.

Personal advice triggers therequirement to provide a statement ofadvice (SoA) subject to variousexemptions. The CorporationsLegislation Amendment (SimplerRegulatory System) Act 2007 (Cth)(SRS Act) introduced a threshold intothe SoA requirements, so that a fullSoA will only be required if the advicegiven is in relation to an investmentamount that is above a certainmonetary threshold (small investmentadvice).

The threshold and the method ofcalculation for various product types have

62 ........................................................................................................................................................................................................ vol ❻ no ❺ October 2007


Corporations AmendmentRegulations 2007 (No.12) — What’s changed?

Mark Radford BLAKE DAWSON WALDRON

Main points

• New authorised deposit-taking (ADI) franchise exemption fromrequirement to include details of anauthorised representative's nameand contact details in financialservices guide (FSG).

• Specifies conduct that falls withinFSG Public Forum exemption.

• Specifies the $15,000 threshold andmethod of calculation relevant toRecord of Advice exemption.

• Specifies kinds of financial productthat apply to the new provisionslimiting liability for multi authorisedrepresentatives.

• Product disclosure statement (PDS)amendments in relation to PDSnotification to the AustralianSecurities and InvestmentsCommission (ASIC); replacementPDSs for stapled securities anddefinition of ‘defective’.

been set at $15,000 by new reg 7.7.9A.The adviser is instead permitted to

provide a record of advice (RoA) to theclient and must keep the RoA.

If the personal advice does notinclude a recommendation to purchaseor sell a financial product, and noremuneration is received by the adviser,the RoA must set out:• the advice given to the

client by the providingentity;

• brief particulars of therecommendations madeand the basis on whichthe recommendations aremade; and

• the information that, ifan SoA were to be given,is required in thestatement by ss947B(2)(d) and (e) or ss947C(2)(e) and (f) of theCorporations Act (that is,the requiredremuneration andinterests information).In all other cases the RoA must

include:• brief particulars of the

recommendations made to the client,and the basis on which therecommendations are made;

• brief particulars of the informationrequired by subss 947D(2) and (3) ofthe Corporations Act if the advicerecommends replacement of onefinancial product with another (thatis, disclosure of applicable charges,pecuniary interests and significantcosts); and

• the information required by ss947B(2)(d) and (e) or ss 947C(2)(e)and (f) as if an SoA were given tothe client (i.e. the requiredremuneration and interestsinformation.The RoA is required to be given to

the client when or as soon aspracticable after the advice isprovided, and in any event before theproviding entity provides the clientwith any further financial service thatarises out of, or is connected with,that advice.

If the RoA is not provided at thetime the advice is provided, the clientneeds to be given at the time astatement containing:

• the information required by ss 947B(2)(d) and (e) or ss 947C(2)(e) and (f); and

• the information required by s 947D(if applicable) relating to additionalinformation when the advicerecommends the replacement of oneproduct with another.

Where a client expressly requests afurther financial service to be providedimmediately, or by a specified time, andthe further financial service is related tothe investment advice given to theclient, and it is not reasonablypracticable to give an RoA to the clientbefore the further service is provided,then the RoA must be given: • within five days after providing the

further advice or as soon aspracticable; or

• if the further service is the provisionof a financial product and s 1019B(cooling off period) applies to theacquisition, before the start of thecooling off period or sooner ifpracticable.

Liability for authorisedrepresentatives

Commences on a day to be fixed byProclamation but no later than 6 months from 28 June 2007

The SRS Act made changes to thejoint and several liability of financialservices licensees for the conduct oftheir authorised representatives inrelation to different kinds or sub-classes of financial product. Thisregulation specifies the kinds offinancial product those new provisionsapply to:

• motor vehicle insurance;• home building insurance;• home contents insurance;• sickness and accident insurance;• consumer credit insurance; and• travel insurance.

These changes and the SRS Act changesdo not appear to have covered all

relevant gaps, but it is an improvement.It has not been expressed to apply to

personal and domestic insurance inreg 7.1.17.

PDS changes

Notification to ASIC of PDSs Commences 1 July 2008.In the SRS Act, the requirement to

notify ASIC of statements (PDSs orsupplementary PDSs) that did not needto be lodged with ASIC was amendedto require notification from 1 July 2008when any ‘change is made to fees andcharges set out in this Statement’. Thiswas too broad and it has been amendedby a new regulation to read when achange is made to the fees and coststemplate required by the enhanced feedisclosures contained in the PDS, ratherthan simply the fees and charges set outin the PDS.

The enhanced fee disclosures refer tothe requirements for the disclosure offees and charges in PDSs forsuperannuation and managedinvestment products. The Fees andCosts template is a standardised feetemplate that simplifies the disclosureof fees and costs and allows for moreeffective comparison across products.The template is set out in items 201

(2007) 6(5) FSN ............................................................................................................................................................................................................................ 63


Personal advice triggers the requirement to provide a statement of advice subject

to various exemptions. ... a full SoA will only be required if the advice given is in

relation to an investment amount that is above a certain monetary threshold

(small investment advice).

and 202 of Sch 10 to the CorporationsRegulations 2001 (Cth).

Replacement PDSs for stapled securities

Commences 29 September 2007.The SRS Act allows the use of a

replacement PDS to correct errors andomissions in a PDS for listed stapledsecurities. The new Regulations clarifythat a licensee must include its licence

number whenever it identifies itself in areplacement PDS.

Definition of ‘defective’ relevant to PDSs

Commences 29 September 2007.A new Regulation clarifies that the

definition of ‘defective’ in s 1022Aapplies to replacement PDSs, andmakes a change providing that non-compliance with s 1013A (which

provides that the PDS must be prepared by the issuer) results in the PDS being defective. Otherwisethe definition of defective wasunchanged. ●

Mark Radford, Partner,Blake Dawson Waldron,<[email protected]>.

64 ........................................................................................................................................................................................................ vol ❻ no ❺ October 2007


Do you need PI Cover?John Bassilios and Harry New HALL AND WILCOX

New compensation requirementswere introduced by Reg 7.6.02AAA ofthe Corporations Regulations 2001(Cth) (the Regulation) on 28 June 2007.These requirements apply to Australianfinancial services licence (AFSL) holdersthat provide financial services to retailclients.

The new obligations under theRegulation will commence on 1 January 2008 for new licensees (thatis, those persons granted a licence from 1 January 2008), and 1 July 2008 forexisting licensees.

The Regulation provides that theprimary method of compliance with theobligation is for licensees to obtainprofessional indemnity insurance, andthat the level of cover should be‘adequate’. However, some licenseesmay rely on alternative arrangementsor guarantees from a related companywho is regulated by the AustralianPrudential Regulation Authority(APRA).

The Regulation provides that thefollowing matters must be taken intoaccount when determining whetherprofessional indemnity insurance isadequate:• the licensee’s membership of a

dispute resolution scheme takinginto account the maximum liabilitythat realistically has the potential toarise in connection with:— any particular claim against the

licensee; — all claims in respect of which the

licensee could be found to haveliability; and

• relevant considerations in relation tothe financial services business carriedon by the licensee, including the:— volume of business;— number and kind of clients;— kind or kinds of business; and— number of representatives of the

licensee.However, general insurance

companies, life insurance companiesand authorised deposit-takinginstitutions regulated by APRA areexempt from the compensationrequirements. Licensees who arerelated to exempt APRA-regulatedentities are also exempt where theyhave a guarantee in place from theAPRA-regulated entity that has beenapproved by the Australian Securitiesand Investments Commission (ASIC).

The Regulation also provides thatsecurity bonds previously lodged withASIC may be discharged or returnedby ASIC where:

(1) the licensee certifies, in the form

approved by ASIC, that it holds

professional indemnity insurance,

or has an alternative compensation

arrangement in place that:

(a) provides compensation

protection for clients of the

licensee that is adequate to

cover claims to which the

security bond could apply; or

(b) together with other financial

resources available to it,

provides compensation

protection for clients of the

licensee that is adequate to

cover claims to which the

security bond could apply;

(2) the licensee is a general insurance

company, life insurance company or

authorised deposit taking institution

regulated by APRA; or

(3) the licensee certifies, in the form

approved by ASIC, that it holds a

guarantee given by a company or

institution mentioned in paragraph

(2) that, together with other

financial resources available to it,

provides compensation protection

for clients of the licensee that is

adequate to cover claims to which

the security bond could apply.

On 23 July ASIC released aconsultation paper on its proposals foradministering the Regulation. In general,ASIC has proposed the following.(1) A licensee’s professional indemnity

(PI) insurance policy should have aper claim limit at least as high asthe maximum monetary limit thatapplies to their external disputeresolution scheme (EDR) scheme(s).

(2) For insurance brokers, the policyshould maintain the aggregateamount of cover which would havebeen required under the supersededInsurance (Agents and Brokers) Act1984 (Cth).

(3) For other licensees: (a) the appropriate measure of a

licensee’s size is the total grossrevenue derived from thelicensee’s dealings with retailclients; and

(b) the minimum aggregate covershould be assessed on a slidingscale as follows:


— for licensees whose actualor expected revenue fromretail services is up to $1million – minimum $2million cover;

— for licensees with revenuegreater than $1 million –minimum cover should betwo times actual orexpected revenue fromretail services (up to acapped minimum of $20million cover).

(4) The policy objective and thelegislation require the following askey features of an adequate PIinsurance policy: (a) the policy must cover loss or

damage suffered by retailclients because of breaches ofobligations under Ch 7 of theCorporations Act 2001 (Cth);

(b) the policy must cover breachesby both the licensee and itsrepresentatives;

(c) the policy must be available tocover compensation awardsmade by the EDR to which thelicensee belongs; and

(d) as far as possible, the policymust continue to provide coverfor a period of time after thelicensee ceases business (forexample, run-off cover).

ASIC has commissioned researchwhich indicates that current polices inrespect of PI insurance products wouldnot be adequate for ASIC’s purposes,in general, because of certainexclusions, such as fraud,representatives acting outside thescope of their authority of andproducts not being on an ‘approvedproduct list’. In these circumstancesASIC has proposed that any shortfallbe made up by a licensee using its ownfinancial resources. ASIC has proposeda procedure which will help licenseesassess whether or not they haveadequate financial resources to meetsuch claims. It is envisaged that thisrequirement will need to be addressedin Regulatory Guide 166.

ASIC will accept applications foralternative arrangements to beassessed on a case-by-case basis.However, alternative arrangementswill not be approved unless they

provide no less protection thanadequate PI cover.

The consultation paper soughtfeedback on:• ASIC’s proposed policy on what is

adequate professional indemnityinsurance cover;

• some challenges to the regime andsome practical options respondingto these challenges;

• ASIC’s proposed guidance on howlicensees should approach the newrequirements; and

• ASIC’s policy for approvingalternative arrangements toprofessional indemnity insurance.Comments on the proposals closed

on 14 September 2007. ●

John Bassilios, Lawyer,<[email protected]>and

Harry New, Partner,<[email protected]>.Hall and Wilcox, Melbourne.

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This article is designed as a refresher,and may prompt a review of thecompliance program within yourbusiness.

In the context of financial servicesbusinesses, compliance operates at twolevels: • first, compliance with the regulatory

requirements that are imposed onboth a licensee and the industry as awhole; and

• second, compliance with internalsystems of control that are imposedby the licensee to achieve compliancewith the regulatory requirements.Section 912A of the Corporations

Act 2001 (Cth) requires that financialservices licensees comply withparticular obligations that aredesigned to underpin the primaryrequirement of operating fairly,honestly and efficiently. It is up to thelicensee to have in place reasonableprocedures to ensure compliance with s 912A.

There is a fundamental principle ofcompliance with the financial servicesreform (FSR) requirements: you mustcomply — there are no half measures.Non-compliance is a breach, and theCorporations Act is unambiguousregarding the penalties that can beimposed for non-compliance.

Reviewing the business activities andthe corresponding FSR requirements isessential. ASIC Regulatory Guides 104and 105 are required reading for allResponsible Managers, directors andcompliance staff. Each licensee shouldidentify those areas of its business thatare likely to cause non-compliance,and will therefore require a higherlevel of supervision and monitoring,through to areas that may be regardedas lower risk and, although theyrequire monitoring, that monitoringmay not be on a continuous basis.

Identifying risk So what is low risk? One example

relates to the primary requirement ofthe financial requirements imposed ona licensee — the requirement to be cashpositive at all times. To ensure that alicensee is literally cash positive at alltimes may suggest that the cash flowprojection is reviewed every day. But ifa licensee has completed a three-monthprojection with accuracy, the risk ofnon-compliance will be low and thereis no need for a daily cash flow review.However, I would expect that a licenseewould need to develop a list ofindicators or triggers that would signala review of the financial resources wasrequired, for example, the receipt of aninvoice in excess of a particular dollaramount.

As a starting point in identifying risk,ask yourself the following question:‘Can any part of the way we operatejeopardise our clients’ position?’ Thenmeasure the inhouse procedures againstthe legislative requirements. Risks toclients need to be identified andproperly addressed by the complianceprogram.

Providing inappropriate advice willjeopardise a client’s position and is highrisk to the licensee, therefore theremust be procedures in place to ensurethat only appropriate advice isprovided. This will include, but is notlimited to, ensuring thatrepresentatives:• have received training in respect of

strategies and products; • are competent in record keeping; • know how to conduct research and

keep working papers; • are aware of what documentation is

required; and• that they can write a clear, concise

and effective statement of advice(SoA).

If you do have an issue that ends upin court, not only the law will betaken into consideration but, in someinstances, broader industry practices.

Once the licensee is satisfied itsrepresentatives have met thesestandards, it must do what isprobably the most important thing,but is often regarded as the leastimportant — and that is to check ifthe representatives are actually doingwhat they are supposed to be doing.

The goal is to be able to operate abusiness that can be successfullyintegrated with the regulatoryrequirements and operate within aculture of compliance. For some, thisis not as easy as it sounds. So manylicensees have the attitude of ‘I runmy business the way I want to, I’mnot doing anything wrong, my clientslove me’. The trouble is, there aretrustworthy and lovable advisers whohave been banned or are in jail.

I would like a dollar for every time a licensee or adviser has said‘I’ve had no complaints from clients,therefore I must be doing everythingright’. The number of complaintsreceived (or not received) is but oneindicator of the effectiveness of acompliance regime, but it does notmean that the business is compliant.In some instances clients don’tcomplain, they just change advisers or they do not realise that the position they are in is cause forcomplaint.

Some may say that compliance iscostly, time consuming and doesn’tadd value to the business. If it iscostly, time consuming and notadding value, your complianceregime may be inefficient. On theother hand, a good complianceprogram will enhance quality,reputation and profitability.

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Industry FORUMFSR

Ensure your compliance program is workablePeter Cashel PARAGEM PARTNERS PTY LTD

Risk management andcompliance program

ASIC requires that every licensee hasin place a documented riskmanagement and compliance programand that the program is followed.Every licensee is required to consider itsparticular business operation andlicencse authorisations, and to:• identify the risks that the licensee

faces;• design and implement controls to

protect the licensee from those risks;and

• monitor the effectiveness of thosecontrolsBoth risk management and

compliance programs must be based onthe respective Australian Standards(AS/NZS 4360:2004 Risk Managementand (AS3806-2006: CompliancePrograms. It is expected that licenseeswill use the standards in planning andimplementing their programs.

Document your programA compliance program must be

documented. This can be onedocument or a series ofdocuments, be it acompliance manual orvarious policies.Documenting the programand having it signed off bymanagement may seemburdensome, but a documentis the only way to give theprogram credibility and givesstaff the ability to refer to therequirements as needed.

Monitor your programMonitoring the program to ensure its

relevance is essential and should takeplace at least annually. However, thereare other occasions, such as changes tothe Act, ASIC policy or the businessoperated by the licensee, that shouldprompt the licensee to review theprocedures and the program to ensureany new requirements will be compliedwith. When changes do occur withoutnotice, the compliance officer shouldimmediately review the program andrecommend changes and ensure thatrepresentatives are aware of the newrequirements. Without appropriatemonitoring, the program may becomeuseless.

Where a breach of the sameobligation occurs time and again, thereis something wrong. The complianceprocedures will require review todetermine why the breach occurs, andthe procedure changed to preventreoccurrence of the breach.

Ensure your program is effectiveIf the policies and procedures of a

program don’t fit the particularbusiness, the program is ineffective.There have been a number of caseswhere licensees have attempted to relyon a compliance program, only to becriticised for its ineffectiveness andinappropriateness. A licensee with twoor three employee advisers in the sameoffice will have quite differentprocedures in place to ensurecompliance from a licensee with anational network of AuthorisedRepresentatives.

The licensee presumes that thepolicies and procedures must be rightbecause a lawyer or consultant haswritten them— and they are in that

they repeat the requirements of theCorporations Act, but what is missingat times are the procedures theparticular licensee has in place toensure it complies with theCorporations Act. It would have beencheaper to by a copy of the Act, orcheaper still to find it on the internet.

When we conduct a licensee reviewwe test the procedures written in thelicensees, policies or compliancemanual that are designed to ensurecompliance. A simple example is this:ifit states in the manual that onlyparticular advisers can provide adviceon margin lending I ask, ‘who are thoseadvisers?’ and the compliance officerusually gives us a list of names. When I

ask, ‘How do you ensure that theseadvisers are the only advisers thatprovide advice on margin lending?’ Iusually get a response like, ‘Well, itsays in the manual that only theseadvisers can and every adviser has readthe manual’. My reply is, ‘Prove to methat every adviser has read the manualand then prove to me that only theapproved advisers provide advice onmargin loans.’ This conversation cango on for an hour.

Reasonable procedureSo what’s a reasonable procedure,

because that is all that is required bythe Corporations Act to ensurecompliance with this internalrequirement? It’s pretty simple, giveeach representative writtenauthorisation as to what products,including margin lending, they can andcannot advise on and deal in.

A reasonable way to ensure that arepresentative has read the compliancemanual is for each representative toacknowledge in writing that they have

read and understood the contents ofthe manual. You may wish to gofurther and have the representativesanswer a few written questions aboutthe manual’s contents to ensure theyunderstand its requirements.

I recently reviewed a licensee thathas around 65 AuthorisedRepresentatives nationally. I waspresented with a supervision andmonitoring policy, written by a lawfirm, that was about 100 pages longand very nicely bound. I was surprisedto find that it actually contained whatI thought were procedures designed toensure that representatives compliedwith the Act and the internalrequirements.

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If the policies and procedures of a program don’t fit the particular business, the program is ineffective. There have been a number of cases where licensees haveattempted to rely on a compliance program, only to be criticised for its ineffectiveness and inappropriateness.

However, like some that areproduced, by page 30 I started toquestion what it was all about, and ifany of the procedures were beingcarried out. I actually felt concern forthe compliance manager. In respect ofone requirement this person had towrite seven different compliancereports a month about the same thingto different people, apart from theother procedural requirements. Aftertesting the requirements as stated inthe manual there was no evidence thata number of other procedures,including ensuring representativeswere compliant, were being followed.The procedures in the policy lookedimpressive, but it was unworkable.

It was my view that the complianceprocedures, even though tailored forthis licensee, were disjointed andcontained too many unnecessary andimpractical requirements. Because theycould never be complied witheffectively, they were not carried out,and the policy sat gathering dust.However, the compliance officer,although not following the proceduresin the policy, did instigate acompliance program and was aware ofwhat was going on, and did try tocreate a compliant culture with theavailable resources.

The compliance officer and theboard of that licensee have nowdeveloped a reasonable, manageableand relevant compliance program andthe compliance officer sleeps at night.

Of the reviews we have conducted,probably 80 per cent of licensees didnot comply fully with therequirements of ASIC RegulatoryGuide (RG) 166. My suggestion toevery licensee is to ensure that theResponsible Manager and the licenseesaccounting staff read RG166 andfollow the requirements, in particularthe cash projection.

Who is going to ensure thebusiness is compliant?

RG104 and RG105 address theissue of separating compliance fromother business functions. Dependingon the nature, scale and complexity ofa licensee’s business, it may beappropriate for a licensee to have aseparate compliance function.

While not all licensees will require a

full-time compliance officer, those thatcarry out the function, be it theResponsible Manager or a seniormanager, must understand what therole requires.

What duty, objective andresponsibility does a complianceofficer fulfill?

The compliance officer has a duty tothe licensee to work with managementand staff to identify and manageregulatory risk.

The overriding objective of acompliance officer is to ensure that alicensee has internal control systemsthat are reasonable, and to adequatelymeasure and manage the risks that it faces.

The general responsibility of thecompliance officer is to provide acompliance service that effectivelyassists business units to comply withrelevant laws and regulations andinternal procedures.

Representatives are also responsiblefor compliance. It is they who mustbe compliant in performing theirrelevant duties.

The person responsible forcompliance should be unfettered incarrying out the duties and thereshould be no conflicts of interest.They should have access to relevantrecords, both in respect of the licenseeand any representatives, be adequatelyresourced and report directly to theboard. There should be no interferencefrom sales or line managers.

It should be recognized thatcompliance and risk management aretwo components of one overallprocess. They are not distinct, eventhough adaptations need to be madeto some normal risk managementmethods because of compliancerequirements.

Difference between risk management andcompliance

In formulating a complianceprogram for a financial servicesbusiness, the difference between riskmanagement and compliance shouldbe understood and a risk assessmentof the business undertaken. Inconducting that assessment, a licenseeshould consider the following.

In compliance, a licensee must seekto eliminate the risk — in most riskmanagement programs you reduce orcontrol the risk to the extent that isacceptable.

The need to eliminate risk meansthat you cannot decide to retain partof the risk.

In financial services you cannottransfer the risk by outsourcingcompliance — it always remains thelicensee’s risk and duty to comply.

A licensee cannot ‘accept’ the risk ofnon-compliance — that is, do nothingand run with the risk.

A licensee cannot elect to take stepsto eliminate a legal risk on thegrounds that is rated a low risk orunlikely to occur.

A compliance policy must state thatthe law will be observed at all times,whereas risk management policies willstate that risks are to be controlled tothe extent acceptable to the business.

The risk to a licensee of advisers notconducting research or providing afinancial services guide (FSG) or a SoAwhen required, for example, is a riskthat cannot be tolerated. Proceduresmust be in place to ensure research isconducted and an FSG and SoA aregiven to clients.

On the other hand, the risk of abusiness being burgled cannot beeliminated, but it can be controlled byhaving doors that lock and documentsin locked cabinets. The processes inplace to prevent a burglary have beenassessed and deemed appropriate andthe risk of burglary has been reducedto an acceptable level by the business.

In conclusion, effective compliancerequires consistent effort, detailedprocedures and methods, togetherwith leadership dedicated topromoting the required corporateculture. ●

Peter Cashel,Compliance ConsultingManager,Paragem Partners Pty Ltd,<[email protected]>.

This article is a modified version ofa paper delivered by Peter to the AFANational Conference on 16 October2007, entitled ‘Taking the compliancerisk out of your business’.

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(2007) 6(5) FSN ............................................................................................................................................................................................................................ 69


CommonwealthLegislation

Corporations (Fees)Amendment Regulations 2007(No 1) (SLI326 of 2007)

These Regulations amend theCorporations (Fees) Regulations 2001 toclarify that the lodgment of areplacement product disclosure statement(PDS) with the Australian Securities andInvestments Commission (ASIC) doesnot attract a fee. The Regulations alsoclarify that the lodgement of a notice inrelation to a PDS or Supplementary PDSdoes not attract a fee if a change is madeonly to the fees and changes in thestatement, or if the financial product towhich the statement relates is no longerrecommended or offered to new clientsin a recommendation, issue or salesituation. The amendment Regulationswere made on 26 September 2007 andregistered on the FRLI on 28 September2007 (FRLI No F2007L03805).Regulations 1–3 and Sch 1 commencedon 29 September 2007 and Sch 2commences on 1 July 2008.

Corporations AmendmentRegulations 2007 (No 12) (SLI 324 of 2007)

These Regulations amend theCorporations Regulations 2001 tosupport the provisions in theCorporations Legislation Amendment(Simpler Regulatory System) Act 2007.The amendment Regulations were madeon 26 September 2007 and registered onthe FRLI 4 on 28 September 2007 (FRLINo F2007L03804). Regulations 1–3 andSch 1 commenced on 29 September2007; Sch 2 commences on thecommencement of Sch 1 Pt 3 items218–219 of the Corporations LegislationAmendment (Simpler Regulatory System)Act 2007; and Sch 3 commences on 1 July 2008.

For details of these regulations, see thearticle by Mark Radford, ‘CorporationsAmendment Regulations 2007 (No. 12)— what’s changed’ on p 62.

Australian Securities andInvestments CommissionAmendment Regulations 2007(No 3) (SLI 322 of 2007)

These Regulations amend theAustralian Securities and InvestmentsCommission Regulations 2001 to allowASIC to disclose particular information tothe Institute of Chartered Accountants inAustralia, CPA Australia and theNational Institute of Accountants for thepurpose of s 127(4)(d) of the AustralianSecurities and Investment CommissionAct 2001. The amendment regulationswere made on 26 September 2007 andregistered on the FRLI on 28 September2007 (FRLI No F2007L03845). Theregulations commence on thecommencement of Sch 1 items 1–48 ofthe Corporations Amendment(Insolvency) Act 2007, that is, 31 December 2007.

Financial Sector LegislationAmendment (SimplifyingRegulation and Review) Act2007 (No 154 of 2007)

This Act amends the financial sectorregulation law to: • implement recommendations of the

Taskforce on Reducing RegulationBurdens on Business to streamline andsimplify prudential regulation;

• provide more equitable financialassistance to superannuation fundswho have suffered loss as a result offraud or theft;

• abolish the special protection account; • consolidate and rationalise prudential

reporting requirements in thesuperannuation industry;

• close a regulatory gap for reportingcontraventions of the market conductand disclosure provisions in theCorporations Act; and

• make technical amendmentsconsequential on the enactment of theLegislative Instruments Act 2003. The Act received Royal Assent on

24 September 2007. Sections 1–3, Sch 1Pt 1, Sch 1 Pt 5 and Schs 2–4 commencedon 24 September 2007; Sch 1 Pt 2

commences on 1 January 2008; Sch 1Pt 3 commences on the day after the endof the period of 12 months beginning onthe day on which the Act received RoyalAssent, that is, 24 September 2008; andSch 1 Pt 4 commences on 1 July 2011.

Financial Sector LegislationAmendment (DiscretionaryMutual Funds and DirectOffshore Foreign Insurers) Act2007 (No 149 of 2007)

Introduced with the Corporations(National Guarantee Fund Levies)Amendment Bill 2007, this Act amendsthe Corporations Act, Financial Sector(Collection of Data) Act 2001 andInsurance Act 1973 to prudentiallyregulate direct offshore foreign insurersand collect information on discretionarymutual funds (which will not beprudentially regulated); and makes anamendment consequential on theCorporations (National Guarantee FundLevies) Amendment Act 2007.

The Act received Royal Assent on 24September 2007. Sections 1-3 and Sch 1commenced on 24 September 2007; Sch 2commences on 1 July 2008; and Sch 3commences on the 28th day after the dayon which the Act received Royal Assent,that is, 22 October 2007.


These Regulations amend theCorporations Regulations 2001 tospecify that: • if a general insurer, in providing a PDS

in relation to a general insuranceproduct, needs to comply with thedollar disclosure requirements, and thisdollar amount can only be determinedafter the responsible person assesses therisk of the insured or after the insuredhas nominated desired levels ofinsurance cover, they can comply by anumber of alternative prescribedmethods:

• a transitional period for complyingwith these dollar disclosurerequirements is provided from the dayafter the Regulations are registered,until 30 June 2008;

• under certain circumstances, theprovision of financial product adviceby an actuary is added to the list of

FSN NEWS

70 ........................................................................................................................................................................................................ vol ❻ no ❺ October 2007


exemptions from the requirement tohold an Australian financial serviceslicence (AFSL); and

• certain circumstances, incorporationby reference is permitted for two typesof documents, the statement of advice(SOA) and the PDS.The amendment Regulations were

made on 22 August 2007, registered onthe FRLI on 24 August 2007(F2007L02637) and commenced on 25 August 2007.


These regulations make amendments tothe Corporations Regulations 2001related to amendments made to theCorporations Act by the Corporations(NZ Closer Economic Relations) andOther Legislation Amendment Act 2007.Section 601CDA of the CorporationsAct, recently introduced by theCorporations (NZ Closer EconomicRelations) and Other LegislationAmendment Act 2007, exemptscompanies, incorporated in a countrythat is prescribed in the CorporationsRegulations 2001, from the requirementto lodge information or a copy of adocument with ASIC that is alreadylodged with an authority of theprescribed foreign country whosefunctions include functions equivalent toany of those of ASIC. The amendmentregulations amend the CorporationsRegulations 2001 to list New Zealand asa prescribed country.

The amendment Regulations wereregistered on the FRLI on 29 June 2007(F2007L01898). The Regulationscommenced on the commencement of Sch2 to the Corporations (NZ CloserEconomic Relations) and OtherLegislation Amendment Act 2007 whichcommenced on 1 September 2007.


These Regulations make amendmentsto the Corporations Regulations 2001related to amendments made to theCorporations Act by the CorporationsLegislation Amendment (SimplerRegulatory System) Act 2007. Forexample, the Regulations make

amendments to prescribe an amount of$5000 for the purposes of s 213(1) (asrecently amended by the CorporationsLegislation Amendment (SimplerRegulatory System) Act 2007).

The amendment Regulations wereregistered on the FRLI on 29 June 2007(F2007L01899). Regulations 1 to 3 andSch 1 commenced on 1 July 2007; reg 4and Sch 2 commenced on thecommencement of the CorporationsLegislation Amendment (SimplerRegulatory System) Act 2007. ●

ASIC

Report on relief applicationsOn 6 September 2007, ASIC released a

report outlining its recent decisions onapplications for relief from thecorporate finance, financial services andmanaged investment provisions of theCorporations Act, between 1 January and 31 May 2007.

Report 97 ‘Overview of decisions onrelief applications (January to May2007’) (REP 97) provides an overview ofsituations where ASIC has exercised, orrefused to exercise, its exemption andmodification powers, from the financialreporting, managed investment,takeovers, fundraising and financialservices provisions of the CorporationsAct. The report also highlights instanceswhere ASIC decided to adopt a no-actionposition regarding specified non-compliance with the provisions andfeatures an appendix detailing the reliefinstruments it executed. A copy of REP97 can be downloaded from the ASICwebsite at <www.asic.gov.au>. ●

Source: ASIC IR 07-41 6.9.2007.

APRA

Discussion paper ondiscretionary mutual funds

On 25 September 2007, the AustralianPrudential Regulation Authority (APRA)released a discussion paper on proposalsfor the collection of data fromdiscretionary mutual funds (DMFs). ADMF may be a trust, mutual, companylimited by guarantee or other structure.Because of their discretionary nature,DMFs are not insurance companies andtherefore are not required to beauthorised by APRA. The government’s

announcement on 3 May 2007‘Enhancing the Integrity of Insurance inAustralia’ foreshadowed that DMFswould not be subject to prudentialregulation but that they would berequired to provide data to APRA underthe Financial Sector (Collection of Data)Act 2001. APRA’s discussion paperincludes draft forms and instructions. Itsets out proposed data collectionarrangements and invites submissions onthese as well as the forms andinstructions. APRA considers theproposed level of reporting will providethe data necessary to assist thegovernment to assess the need toprudentially regulate DMFs.

Submissions on the discussion paperand reporting requirements close on 2 November 2007. The discussion paper,forms and instructions are available fromthe APRA website at:<www.apra.gov.au>.

Source: APRA MR No 07.47 25.9.2007.

Online breach reportingAPRA has released a new version of

the online form for lodging a breachnotification under s 29JA of theSuperannuation Industry (Supervision)Act 1993 (SIS Act). Under s 29JA of theSIS Act an RSE licensee is required togive APRA a notice setting out particularsof a breach of any condition imposed onits license under ss 29E and 29EA of theSIS Act. All breaches, regardless ofmateriality, must be reported to APRA. Abreach must be notified within 14 daysafter the corporate trustee or a memberof the group of individual trusteesbecomes aware a breach has occurred.Failure to notify APRA of a breach of anRSE licence condition is a strict liabilityoffence and a penalty of 50 units ($5500for an individual and $27,500 for a bodycorporate) may apply. The online form isaccessible from the APRA website at:<www.apra.gov.au>. ●

AUSTRAC

Guidance note on riskmanagement and AML/CTFprograms

The Australian Transaction Reportsand Analysis Centre (AUSTRAC) hasreleased a Guidance Note on RiskManagement and AML/CTF Programs.

http://www.apra.gov

http://www.asic.gov.au

http://www.apra.gov

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The purpose of the guidance note is to: provide general information about risk

management frameworks and relevantlegislative requirements under the Anti-Money Laundering and Counter-Terrorism Financing Act 2006(AML/CTF Act) Act and Anti-MoneyLaundering/Counter-Terrorism FinancingRules (AML/CTF Rules) relating toAML/CTF programs; and

assist reporting entities in implementingan AML/CTF program appropriate totheir business having regard to thebusiness size, nature and complexity.

A copy of the guidance note isavailable at: <www.austrac.gov.au>.

Guidance note on civil penalty orders

AUSTRAC has released a GuidanceNote on Application of the Policy (CivilPenalty Orders) Principles 2006. Thepurpose of the guidance note is toprovide information to reporting entitiesabout the AUSTRAC CEO’s approach tothe Policy Principles, including whatconstitutes reasonable steps. The effect ofs 3(1) of the Policy Principles is that theAUSTRAC CEO may apply for a civilpenalty order under s 176 of theAML/CTF Act in respect of a reportingentity for a contravention of a provisionthat is enforceable by the imposition of acivil penalty. This may be done if theAUSTRAC CEO is satisfied that thereporting entity has failed to takereasonable steps to comply with theprovision during the specified 15 monthperiod.

A copy of the guidance note isavailable at <www.austrac.gov.au>.

Release of draft Rules On 24 August 2007 AUSTRAC

released draft Rules on thresholdtransaction reports and a revised draft onongoing customer due diligence. Underthe AML/CTF Act all reporting entitieswill be required to report certainthreshold transaction details and carryout ongoing customer due diligence from12 December 2008.

The draft AML/CTF Rules set out theproposed reportable details for thresholdtransactions to AUSTRAC as well asrequirements for ongoing customer duediligence. Comment on the draft rulesclosed on 14 September 2007.

A copy of the draft rules is available at<www.austrac.gov.au>. ●

IFSA

Streamlining Breach Reportingdiscussion paper

The Investment and Financial ServicesAssociation (IFSA) has welcomed therelease of the discussion paper,Streamlining Breach Reporting, by APRAand ASIC. IFSA will consult withmembers and prepare a submission, priorto the closing date of 31 October 2007.

IFSA Deputy CEO JohnO’Shaughnessy said that the proposal toallow a single online report to bothinstitutions, as part of the governmentresponse to the report of the RethinkingRegulation Taskforce, will streamline thebreach reporting process in many casesand remove duplication where a reportmust be submitted to both regulators.

Source: MR 4 October 2007.For further details, see the article by

Michael Vrisakis, ‘Recent developmentsin breach reporting’ on p 61.

Supporting super decisionsrequires industry-wide effort

IFSA and Investment Trends havepublished their report, Super Decisions:Communicating with Customers andEffective Disclosure. It follows qualitativeand quantitative research of people whohave made a superannuation decision inthe previous year or two, and providesinsights as to how customers make theirdecisions and the importance ofdisclosure documents.

Richard Gilbert, CEO of IFSA, notedthat viewing the superannuation decision-making process from the customer’sperspective has provided a clear pictureof where the industry needs to lift itsgame, also noting, ‘The high levels ofsatisfaction and comfort recorded in ourresearch show that many companies aresupporting the decision-making processwell, however we can’t ignore the factthat customers are still calling for shorterdocuments that are presented well andwritten in plain English. Regardless of thesize and complexity of the information,customers are making an effort to readthe documents.

‘Through this research, we know thatthe workplace and the employer’s choice

of default fund are crucial to decision-making behaviour — particularly forthose under the age of 45 years. Weknow that that information onperformance, risk, investment optionsand fees is most important to people —all areas where we’re told the documentscan be improved.’

The report contains sixrecommendations that will requireindustry-wide effort to better supportsuperannuation decisions.

1. Continue to support the FinancialLiteracy Foundation’s focus on workplacefinancial education programs through thedevelopment of initiatives for theindustry’s own employees and tools tohelp other workplaces.

2. Further research, testing PDScomposition, categorisation andpresentation of information

3. Further research, testing ways toimprove customer understanding of keyinvestment concepts.

4. Greater use of online superannuationaccount checking and increasing thefrequency and timeliness of superstatements i.e. emailing statements.

5. Development of descriptors that canbe applied consistently in conjunctionwith the names of documents to improveunderstanding about what each of thedocuments is and what they are designedto do.

6. Continue to promote best practicethrough the development of industrystandards and use of the IFSA logo.

The Report is available from:<www.ifsa.com.au>. ●

Source: MR 20 September 2007.

Inaugural meeting of FICABoard with ASIC and APRAexecutive

On 31 July 2007, the Board of theFinance Industry Council of Australia(FICA), together with Abacus, AustralianMutuals and the Association ofSuperannuation Funds of Australia(ASFA), met with the ASICCommissioners and APRA members todiscuss significant regulatory and industryissues facing the financial servicesindustry. The meeting focused on issuesthat are relevant to the responsibilities ofthe two agencies. It was also providedwith an update of the work of the JointAPRA/ASIC Working Group that is

http://www.austrac.gov.au


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ISSN: 1035–2155 Print Post Approved PP 25500300764 Cite as (2007) 6(5) FSN

This journal is intended to keep readers abreast of current developments in the field of financial services. It is not, however, to be used or relied upon as a substitute for professional advice. Before acting on any matter in the area, readers should discuss matters with their own professional advisers. Thispublication is copyright. Except as permitted under the Copyright Act 1968 (Cth), no part of this publication may bereproduced by any process, electronic or otherwise, without the specific written permission of the copyright owner. Neither may information be stored electronically in any form whatsoever without such permission.

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72 ........................................................................................................................................................................................................ vol ❻ no ❺ October 2007

evaluating how any overlaps,inconsistencies or duplication in theactivities of the two agencies might be reduced.

The meeting was a response to theGovernment’s encouragement of ASICand APRA to explore with industryrepresentatives possible mechanisms toprovide industry with the opportunityto raise issues about how regulatorycoordination operates in practice.Rethinking Regulation: Report of theTaskforce on Reducing RegulatoryBurdens on Business (January 2006)had also made recommendations aboutimproving industry consultation. FICAconsists of the Australian Bankers’Association, Australian FinanceConference, Australian FinancialMarkets Association, Financial PlanningAssociation, Insurance Council ofAustralia and IFSA. ●

Source: MR 9 August 2007.

CPA Australia

Concerns about disclosurerequirements for unlisted,unrated debentures

CPA Australia has provided asubmission to the Australian Securitiesand Investment Commission (ASIC)raising concerns about its proposals toimprove disclosure requirements forunlisted, unrated debentures.

While welcoming ASIC’s proposalsin principle, CPA Australia warnsagainst relying primarily on disclosureimprovements to achieve the desired outcome of retail investorsunderstanding the inherent risks of investing in unlisted, unrateddebentures.

ASIC’s consultation paper identifies arange of significant potential risks ofthese types of investments and proposesthat issuers of unlisted, unrateddebentures be required to disclose eightrelevant benchmarks for these on an ‘if

not, why not’ basis.

According to CPA Australia’s financialplanning policy adviser Kath Bowler,benchmarks are not always a reliableindicator of value and require expertknowledge to interpret.

Ms Bowler said ‘Although unlisted,unrated debentures are high-risk andoften complex investments, many retailinvestors are attracted to them becausethey may appear on the surface toresemble term deposits, And it isunrealistic to expect individual investorsto understand benchmark figures, oreven read them. Indeed, in the absenceof expert professional advice, providingbenchmarks may inadvertently add tothe impression of a safe and comfortableinvestment option when recentexperience has certainly demonstratedotherwise.’

CPA Australia emphasises thatimproving disclosure is only one elementof assisting retail investors make betterinvestment decisions. While retailinvestors must take responsibility fortheir investment decisions and ensure thatthey seek further information orprofessional financial advice whereappropriate, ASIC, professional financialplanners and credit ratings agencies alsoall have a role to play. ●

Source: CPA Australia, 4 October2007. To view CPA Australia’ssubmissions on this and other topics, visit<www.cpaaustralia.com.au/links?14131_24418>.

Standards Australia

Two new employmentscreening handbooks

Standards Australia has published theEmployment Screening Handbook; andthe Reference Checking in the FinancialServices Industry Handbook which wasdeveloped in close collaboration withthe Australian Securities and InvestmentsCommission (ASIC).

Supporting the Australian Standardfor Employment Screening (AS 4811-

2006), the only Standard of its type inthe world, the handbooks have beenproduced to assist employers reduce therisk of potential security breaches andensure the identity, credentials andintegrity of staff and contractors.

The Employment ScreeningHandbook provides a framework tobuild an employment screening processthat could be just as effectively used in amulti-nation corporation or a start upsmall business. It is designed to reducethe risk of individuals using fraudulentand deceptive means to gainemployment, advance through the ranksor gain other benefits they may not beentitled to or qualified for.

It examines in detail all aspects ofbuilding an effective employmentscreening regime including: • developing an employment risk

analysis; • the employment screening process; • communicating with staff; and • the types of people employed to do

the screening The Reference Checking in the

Financial Services Industry Handbookhas been developed by the AustralianSecurities and Investments Commission(ASIC) in partnership with StandardsAustralia to provide a reference-checkingframework for the financial servicesindustry to minimise the movement ofdishonest, incompetent or unethicalemployees or representatives within theindustry.

It provides clear guidelines to helpemployers use a reasonable andobjective process to gather relevant,factual and balanced information forreference checks.

Together, the two handbooks providethe best possible guidance to helpemployers reduce the risk of securitybreaches and ensure the identity,credentials and integrity of staff andcontractors. ●

Source: 11 October 2007,<www.standards.org.au>.

http://www.cpaaustralia.com.au/links?14131_24418

http://www.standards.org.au




print post approved 255003/06151 financial services · print post approved 255003/06151 ......

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