Corporate and Financial Services Regulation Review

Corporations and Financial Services Division

The Treasury

Langton Crescent

PARKES ACT 2600

Corporate and Financial Services Regulation Review – Consultation Paper

I would like to make the following comments on the above consultation paper.

A. General Comments

1. I appreciate that the purpose of the consultation paper is to obtain feedback from interested parties to enable the identified regulatory issues to be clarified and firm proposals for their solution to be developed. Nevertheless, I have found it challenging to provide specific or detailed comments on many of the issues because:

a. the real-world regulatory problem is not always clear;

b. no clear solution is suggested; or

c. where a solution is suggested, the rationale for it is not clear. In particular, it is not always clear how (or even whether) the suggested solution will actually reduce regulatory burdens.

2. Accordingly, I suggest that subsequent stages of this law reform process should strive to:

a. clearly identify the regulatory problem which each proposal is designed to address;

b. clearly identify plausible options for addressing the problem;

c. clearly identify the costs and benefits of each option – including the costs of implementing any regulatory change.

3. I note that the Taskforce on Reducing Regulatory Burden recognized that Australia's financial services regulatory regime is highly regarded internationally (p88). This reputation should not be put at risk. While the Taskforce recognized that some improvements to the regulatory regime can and should be made, care should be taken to ensure that any proposed amendment is, in fact, an improvement. In other words, any proposed change should be made only if it addresses a real problem and only if the benefits of the proposed change outweigh the costs.

4. The costs of change should be considered as part of this process. The Financial Services Reform Act has been subject to almost continual change over the past 4 years since its commencement in March 2002. This change has been brought about through one major reform Act and at least 10 ‘batches’ of regulations. Whether all this tinkering with the regulatory requirements has significantly benefited consumers or industry is debatable. There is a cost associated with each of these changes, even if that cost is limited to paying for legal advice to work out what the new requirements actually mean and implementing systems to comply with the new law. Industry participants that have invested time and money complying with regulatory requirements can be disadvantaged where changes to the law are made which in practice require them to invest more time and money to change their compliance systems.

5. I also suggest that adequate time should be devoted to ensuring that any changes to the law are clearly and unambiguously expressed in one place (whether in legislation or regulations). So far as possible:

a. industry should not be required to find their way out of a ‘regulatory maze’ in order to comply with the law. The most notorious regulatory maze, of course, is the dollar disclosure regime where the regulatory requirements are determined by a complex interaction of legislation, regulations and ASIC instruments;

b. obligations should be set out in legislation or regulations and not merely as statements of expectation in accompanying Explanatory Materials.

B. Specific Comments on some aspects of the Consultation Paper

Issue 1.2: Situations where a Statement of Advice does not have to be prepared

6. It would seem reasonable in principle to provide SOA relief in respect of advice that arises out of a 'genuine fact-finding' process, along the lines described in the ASIC FAQ (QFS 154).

7. However, it would not, in my view, be reasonable to provide an SOA exemption in respect of all advice that did not result in a recommendation to acquire a financial product where no remuneration is received for the advice. To introduce such an exemption would seem to inappropriately exempt the following types of advice from the SOA obligation:

a. personal advice to switch between sub-funds within a superannuation fund;

b. personal advice that a client increases his or her superannuation contributions to a particular fund;

c. personal advice that a client alters his or her level of insurance cover under a superannuation fund in which he or she is currently a member;

d. personal advice about investment strategies which the client should adopt;

e. personal advice to sell a product (and use the money to buy something which is not a financial product, such as some property investments).

Issue 1.3: Issue of disclosure documents when product or advice is rejected

8. It would seem reasonable in principle not to require an FSG or SOA to be given to a client where:

a. personal advice has been provided to the client;

b. the client makes it clear that he or she does not wish to act on it; and

c. the advice is relatively simple (ie the advice and the basis for the advice can be comprehended without the aid of a SOA).

9. However, it would not seem appropriate to attempt to provide relief in respect of more complicated form of personal advice, such as financial planning advice. This is because a written explanation of the advice will generally be needed for the client to make an informed and rational decision to accept or reject the advice.

Issue 1.7: Standardised Financial Services Guide

10. I agree that FSGs should not need to contain details about any individual providing financial services where the identity and remuneration of that individual are not relevant to the consumer. However, this result would seem to be already largely achieved via Reg 7.7.05B, which applies in respect of all individuals appointed as authorised representatives, regardless of whether the authorisation is given by the licensee or an authorised representative.

Issue 1.10: Treatment of employers

11. I strongly disagree with the proposal that employers (other than small businesses) should be treated as wholesale where they receive services relating to superannuation products.

12. Notwithstanding the introduction of superannuation choice of fund in July last year, it is likely that most employees will not exercise choice and will, therefore, contribute to the employer’s default fund. The selection by employers of appropriate default funds will therefore be critical to the future financial well-being of large numbers of Australian employees.

13. There is no reason to assume that the human resources departments of larger employers will necessarily possess the skills necessary to select appropriate default funds for employees. It is vital therefore that employers receiving default fund advice are given advice which is sound (ie which complies with s945A of the Act). It is also critical that employers are given enough information to assess whether or not to rely on the advice - in particular, they must be given information about conflicts of interest which may taint the advice they receive.

Issue 1.14: Dollar Disclosure for general insurance

14. The issue appears to be whether changes to the law should be made regarding the disclosure in PDSs of costs (premiums) and benefits arising in respect of general insurance products.

15. Subject to transitional arrangements, the current law is that the consumer must be given (in a clear, concise and effective manner) all the information about costs and benefits that a retail client would reasonably require to make a decision to acquire the product. In addition to this general obligation, the dollar disclosure requirements (reflected in the Act, regulations and ASIC class orders) generally require:

a. disclosure of the significant factors affecting the cost of the product including an explanation of the impact of those factors on the cost - see ASIC Class Order 04/1431;

b. worked dollar examples to illustrate benefits - see ASIC Class Order 04/1430 and para 29 of PS 182.

16. It would seem reasonable to provide relief from the dollar disclosure provisions in respect of the cost of acquiring a general insurance product where such disclosure is otherwise provided to the client before the commencement of the 14-day cooling off period for the product.

17. It is far less clear that relief in respect of significant benefits is needed or warranted. The proposition that worked dollar examples of benefits may confuse consumers should be tested. Do consumer groups agree? My expectation is that examples would normally assist consumers to understand how various factors actually influence the calculation of a benefit.

Issue 1.15: Incorporation by reference in disclosure documents

18. This proposal would appear to be reasonable provided adequate protections are included in the law, which may include, for example:

a. that the person responsible for the document should be liable for any deficiency in the material incorporated by reference - this would include the circumstance where the incorporated material is not clear, concise and effective;

b. that the material incorporated by reference should be given to the consumer by the issuer on request (eg if the consumer does not have ready access to Internet);

c. that record-keeping obligations (eg s1015D) apply in respect of material incorporated by reference.

Issue 1.18: Exemption from the requirement to provide a Financial Services Guide

19. It is not clear why the provision of an FSG to persons attending 'educational' seminars is considered to be 'excessive'. Even if a seminar is genuinely educational, consumers should be given an FSG to enable them to assess how much weight to place on the advice they receive.

Issue 1.23: Authorised representatives

20. The analysis in the Consultation Paper does not appear to take account of s917A(3). The effect of that provision (together with s917C(3)) is that where a product is issued to a client, the product issuer is solely liable for the conduct of a representative that results in that issue.

Issue 4.2: Remove directors' duties for single-director companies

21. I disagree with the proposal that directors duties to be removed for single director companies.

22. The purpose of directors duties is not simply to regulate the relationship between directors and shareholders, although that is obviously an important purpose. Directors duties are also critical to protect the interests of the company’s creditors. In particular, the duty to prevent insolvent trading in s588G should clearly continue to apply in respect of all companies, whether single director companies or not. Removing this duty would adversely affect the interests of creditors, especially unsecured creditors.

23. Further, the duty to act in good faith in the best interests of the corporations (s181(1)(a)) should continue to apply so as to provide protection for creditors in the event that a company is nearing insolvency (Walker v Wimborne: (1976) 137 CLR 1).

24. Where a company has one director but more than one shareholder there are additional reasons why directors duties are needed. In such cases directors should be required to act in the best interests of the company as a whole which generally means in the interests of shareholders collectively rather than individually. It does not seem appropriate to allow shareholders to, in essence, ‘opt out’ of this protection – to allow opting out would only serve to facilitate oppression of less sophisticated shareholders within small companies.

25. I tend to disagree with the argument in the Consultation Paper to the effect that directors duties are less important for small companies than large listed companies. On the contrary, there are numerous additional mechanisms (apart from directors duties) to help to protect large listed company shareholders which do not apply in relation to small proprietary limited companies, for example:

a. requirements of the ASX Listing Rules;

b. the ASC Corporate Governance Council's Principles of Good Corporate Governance and Best Practice Recommendations;

c. various legislative requirements relating to transactions in which directors have an interest - for example, Chapter 2E and s195;

d. the requirement to appoint an auditor;

e. marketplace scrutiny - from stockbrokers and institutional investors.

Issue 4.3: Extend the Business Judgment Rule

26. I am not convinced of the merits of extending the business judgment rule defence to duties other than the duty of care. At least, the duty to prevent insolvent trading (s588G) should continue to apply unaffected by the business judgement rule. To apply a business judgment rule defence to s588G would not be likely to strike an appropriate balance between 'good behaviour' and 'sensible commercial risk-taking' (as referred to in the Taskforce Report, Recommendation 5.3). Rather, it could facilitate insolvent trading (to the detriment of the company’s creditors) in circumstances where the directors would not otherwise have a defence. (Note that s588H already provides directors with specific defences in respect of insolvent trading). I would also argue that the business judgment rule should not operate as a defence to ss182 and 183 – which relate to directors abusing their position of trust for personal profit.

27. I also tend to disagree with the proposal to remove ss180(2)(b) and (c). The effect of s180(2)(b) is that directors wishing to rely on the business judgment rule must not have a material personal interest in the matter. The effect of s180(2)(c) is to require directors wishing to rely on the business judgment rule to inform themselves about the subject matter of the judgment - ie to make reasonable inquiries. To remove these requirements could facilitate inappropriate conduct, such as wilful blindness by directors. In any event I would strongly suggest that recent cases (for example Australian Securities and Investments Commission v Adler (2002) 168 FLR 253) be carefully reviewed before any decision is made to remove ss180(2)(b) and (c).

Please contact me if you wish to discuss these comments.

Yours faithfully

Andrew Serpell

Assistant Lecturer

Department of Business Law and Taxation

Monash University

900 Dandenong Road

CAULFIELD EAST 3145