Financial Services Update: Over 6,000 Submissions Received by Financial System Inquiry

ASIC seeks feedback on extending relief to registered schemes

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In this edition:

  • ASIC seeks feedback on extending relief to registered schemes; and
  • over 6,000 submissions received by Financial System Inquiry.

ASIC seeks feedback on extending relief to registered schemes

The Australian Securities and Investments Commission (ASIC) has released Consultation Paper 223 (CP) seeking feedback on its updated version of Regulatory Guide 174 entitled ‘Relief for externally administered companies and registered schemes being wound up’ (RG 174). A draft updated RG 174 has also been released.

As its title suggests, the CP considers changes to the current legislative framework provided by theCorporations Act 2001 (Cth) (Corporations Act) and Class Order 03/392 (Class Order) governing how companies in external administration can seek relief from ASIC to defer, or have a full exemption from, meeting their financial reporting obligations and/or their obligation to hold an annual general meeting.

Of more interest to us is how ASIC proposes to extend the scope of their existing relief scheme to registered managed investment schemes that have become insolvent and are in the process of being wound up.  The current version of RG 174, reflecting the current Class Order, is silent on this topic.  ASIC is seeking feedback on its proposal to introduce a new class order to provide an exemption for registered schemes (that are being wound up) from meeting their financial reporting obligations under the Corporations Act where:

    • the scheme is insolvent (i.e. scheme property is insufficient to meet the scheme liabilities to scheme creditors as they fall due);
    • the value of net assets of the scheme is no more than $5,000 throughout the relevant financial year; and
    • ASIC has been formally notified of the commencement of the winding-up of the scheme.

If the above circumstances are met, ASIC will not take action against the responsible entity and its officers, or any court-appointed person responsible for winding up the scheme for their failure to comply with the scheme constitution provisions requiring a final audit of the financial statements to be undertaken as a consequence of the winding-up.

ASIC’s justification for allowing exemptions to apply to insolvent schemes reflects the same reasoning for the current regime that applies to companies. The reasoning is that the time, human resources and financial constraints involved in complying with financial reporting obligations ultimately create an unreasonable burden for the scheme members and creditors, especially where it is likely that there will be little or no return to members.

Other proposed relief initiatives relevant to a registered scheme are options to seek:

  • deferral of its financial reporting obligations where it’s being wound up for a maximum period of 12 months (previously, only externally administered companies could defer their reporting obligations and only for a period of 6 months); and
  • deferral of its financial reporting obligations where the responsible entity, not the scheme, is being externally administered (subject to the responsible entity demonstrating that the appointment of the external administrator had ‘significantly’ disrupted its management of the scheme).  The registered scheme does not have to be wound-up in this case.

If a registered scheme is granted a deferral from its financial reporting obligations, then ASIC makes it clear that (subject to exemptions) it will generally not relieve the responsible entity from its obligation to obtain a compliance plan audit report. If the future of the registered scheme is unclear, the completed audit report will at least provide some useful information for interested parties about the status of its affairs.

The CP also proposes to resolve some ambiguity around whether the Class Order relief applies to a company that is also an Australian Financial Services Licensee (AFSL).  According to ASIC, companies that hold an AFS Licence should not be eligible for the financial reporting exemptions, given that the fundamental obligation of an AFSL is to be able to meet all financial requirements at all times, including debt obligations. Because this is the primary duty of an AFSL, they should apply for cancellation of their AFSL rather than relief.

Comments on the updated RG 174 are due by 20 October 2014.

Over 6,000 submissions received by Financial System Inquiry

The deadline for public submissions in response to the Interim Report released by the Financial System Inquiry (Inquiry) in July closed on 26 August 2014.  On 5 September 2014 the Inquiry announced that it had received over 6,300 submissions in response to the issues set out in the Interim Report.  Over 5,000 submissions, or 79%, were received on the issue of ‘credit card surcharges’.   We previously wrote a blog on the key observations made in the Interim Report and it’s clear from the reaction that the Interim Report has created that the Inquiry’s final report will be highly anticipated.

Although the list of authors of the submissions published on the Inquiry’s website reads like a who’s who of the Australian financial services industry, significantly, a large bulk of submissions are from individual members of the public. These concerned individuals remind us that credit card charges, superannuation and adequate banking regulation is an issue that affects a large body of retail consumers, not just professional service firms and institutional investors.

The final report is due by November 2014.

As we’ve seen over the past few months, the issues identified in the Interim Report are only some of the major concerns affecting the financial services industry in Australia at the moment.  With revelations of compliance issues at Macquarie Private Wealth as well as the notorious problems at Commonwealth Bank’s financial planning arm, we are primed to wonder ‘what (or who) is next?’. What is certain however, is that the profession of financial planning and advice will come under close scrutiny. The question of just how troubled and fraught this industry is remains to be answered.

As reported in the Sydney Morning Herald, recent comments by the Commonwealth Bank conceding that ‘general’ financial advice should in fact be renamed ‘sales’, reveals just how misleading this sector of the industry is. The Commonwealth Bank basically admits that its ‘planners’ are in fact more like salespersons, flogging their wares to unsuspecting superannuants and retirees, rather than acting to uphold their trust and confidence.

The inherent dangers of this misleading approach have recently been aired in the debate accompanying the Federal Government’s Future of Financial Advice changes. The clear conflict of interest apparent from selling incentivised products, rather than giving advice to individual investors seems to be a lesson not yet learnt.

The Interim Report highlighted the area of financial advice as a key area for review and its clear from recent events that reform is crucial in this area.  Given the sheer number of responses it has received, it remains to be seen whether or not the Inquiry will be able to deliver its recommendations by the November deadline, or even by the end of 2014. In a one step forward, two steps back manoeuvre, it will be interesting to see how the Government reacts to any recommendations of the Inquiry requiring increased regulation and scrutiny in the industry, given their ‘reducing red tape’ mantra.

Stay tuned for our response once the final report is released.


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