Hot topics in banking and financial services

By Randal Dennings and Graeme Howatson.

Key Points:
The implementation of FSR continues to be a major issue for the financial services providers. More legislative and administrative changes which affect particular sectors of the financial services industry, or the industry generally, are on the way.

In recent years there have been major changes in the laws affecting banking and financial services and there are no signs that the pace of change is slowing.

Financial services reform

The Financial Services Reform Act 2001 (which amends the Corporations Act 2001) becomes fully operational on 11 March 2004. In order to clarify the operation of some the FSR provisions of the Corporations Act, a number of amendments have recently been made to these provisions and the Corporations Regulations 2001.

The Financial Services Reform Amendment Act 2003 sets out the latest amendments to the FSR regime. The Act includes provisions which:

• detail the disclosures required of a person making an unsolicited offer to purchase a financial product other than on a licensed financial market;
• broaden the exception to the requirement to provide a statement of advice when personal advice is given in a "live" market situation (eg. advice given by a stockbroker on the telephone to a client);
• allow for a financial services guide and a product disclosure statement to be combined into one document;
• amend the reporting requirements so that a financial services licensee is now only obliged to report "significant" breaches or likely breaches of sections 912A and 912B of the Corporations Act to ASIC.

The newest regulations affecting the FSR regime are the Corporations Amendment Regulations 2004 (No. 2) and the Corporations Amendment Regulations 2004 (No. 3).

The implementation of FSR will continue to be a major issue for the industry after 11 March 2004. In addition, there are further changes on the way. In December 2003, the Federal Government released a position paper on compensation for losses incurred in the provision of financial services. The Government proposes that section 912B of the Corporations Act be amended to require financial services licensees to have compensation arrangements to cover acts, errors or omissions for which the licensee is legally liable and the conduct of its representatives for which it is responsible. It is suggested that professional indemnity insurance will be the usual way to meet this obligation. Industry and public submissions on the paper have been sought and the Government will announce its final position after considering the submissions.

The Government has also released draft regulations which provide that ASIC can only provide an exemption from the requirement to disclose fees, charges and commissions in dollar terms (or alternatively in some cases, as a percentage) if there is a "compelling reason".

Regulation of mortgage/finance brokers

If the level of media coverage is any indication, the regulation of finance brokers is undoubtedly a hot issue. At the annual meeting of the Ministerial Council on Consumer Affairs in August 2003, Ministers endorsed the development of uniform legislation "… which builds on the New South Wales Consumer Credit Administration Amendment (Finance Brokers) Act 2003". (This Act, which was passed by the New South Wales Parliament in June 2003, is yet to come into force.)

The issue of uniform legislation is expected to be discussed further at the next meeting of the Council in August 2004.

Conflicts of interest

The CLERP 9 Bill, Corporate Law Economic Reform Program (Audit Reform and Corporate Disclosure) Bill, was introduced into Parliament on 4 December 2003. A provision of the Bill affecting all financial services licensees is the proposed amendment to section 912A of the Corporations Act which will add an additional duty to the duties of financial services licensees set out in the section.

Proposed section 912A(1)(aa) will require licensees to have adequate arrangements for the management of conflicts of interest that may arise wholly or partially in relation to activities undertaken by the licensee, or the licensee's representative, in the provision of financial services as part of the financial services business of the licensee or their representative.

In anticipation that this amendment will be passed, the ASIC has issued has released a policy proposal paper titled Licensing: Managing conflicts of interest. This paper sets out guidance for licensees on compliance with the new provision.

This paper is discussed in greater detail in Managing conflicts of interest - ASIC's policy proposal in the February edition of Banking & Financial Services Insights.

It is possible that section 912A(1)(aa), may come into operation as soon as January 2005. The ASIC's policy proposal makes it clear that from the date that the amendment commences, it will not be acceptable to have informal or ad hoc arrangements for managing conflicts. We suggest that it may be wise to start planning for a review and any necessary changes sooner rather than later.

Superannuation reforms

In October 2002, the Federal Government released the report of the Superannuation Working Group ("SWG") on options for improving the safety of superannuation. The SWG, which was comprised of representatives from the Federal Treasury, the Australian Prudential Regulation Authority ("APRA") and the ASIC, recommended changes to the prudential regulatory framework for superannuation funds.

The Superannuation Safety Amendment Bill 2003 which was introduced into the House of Representatives on 27 November 2003, is the Federal Government's response to the SWG's recommendations. The Bill principally amends the Superannuation Industry (Supervision) Act 1993 (the "SIS Act") and the reforms that it provides for are similar to amendments to the Insurance Act 1973 which came into operation on 1 July 2002.

The Bill, as introduced into Parliament, provides for:

• the licensing by APRA of the trustees of superannuation entities it regulates;
• the new trustee licenses to be subject to conditions which will require trustees to meet fitness and propriety standards, implement and maintain risk management strategies appropriate to the trustee's operations and have risk management plans for the funds controlled by the trustee;
• the registration of superannuation entities that are regulated by the SIS Act;
• new more effective enforcement powers; and
• a two year transitional period, with the provisions of the Bill coming fully into operation on 1 July 2004.

On 27 February 2004, APRA released draft guidelines which are intended to provide preliminary advice about the requirements that will apply to trustees granted a licence under the superannuation safety amendments. The draft guidelines released are the fit and proper operating standard, the outsourcing operating standard, the adequate resources operating standard, the risk management requirements and the net tangible assets definition.

Water securities

The States and Territories have legislation which provides for the management of water resources and gives the holders of water rights the legal authority to take water from a water source. Until comparatively recently, water rights were attached to land. This meant that when a mortgagee took a mortgage over land as security for a loan, water rights were generally included as part of the security. Now all the States and Territories have legislated to make water rights separate from land title and to allow water rights to be traded.

Care must be taken by financiers to ensure that the security taken by them includes specific securities over relevant water rights and to ensure that no subsequent mortgages or dealing in those rights can take place without the consent of the financier. This is particularly the case in Queensland because some final resource operations plans, which are necessary to enable permanent trading and to define water trading rules, are not expected to be completed until after 2005.

Change is the only constant

There are no signs of a slowing in the pace of legislative and administrative changes affecting the financial services industry. All financial services licenses are issued subject to the condition that the licensee establishes and maintains compliance measures that ensure, as far as reasonably practicable, that the provisions of the financial services laws are complied with. The importance then of keeping up to date with what's hot cannot be overstated.

For further information, please contact Randal Dennings and Graeme Howatson.