A round up of key relevant legislation, enacted or proposed, over the last month including recent rumblings by the Government to bolster penalties for corporate and financial misconduct, Treasury’s client money reform agenda and the Government’s approach to Managed Investment Trusts and stapled structures.

In this issue, you will find:

• Increased penalties for corporate and financial misconduct
• Treasury consults on Ipso Facto Insolvency Regulations
• Treasury consults on regulations to protect client money in the financial sector
• Restrictions on the use of “client money” commence
• Flip-flopping on policy – the Australian Government’s approach to MITs and stapled structures
• Treasury consults on Banking Executive Accountability Regime (Size of an Authorised Deposit-taking Institution) Determination 2018
• New Assent - Treasury Laws Amendment (2017 Measures No. 5) Act 2018 No. 27 (Cth) – licensed benchmark administrators and others
• ASIC consults on Phase 2 Fees-for-service draft legislation in relation to the new industry funding model

The Treasurer and the Minister for Revenue and Financial Services have announced that the Government is strengthening criminal and civil penalties for corporate misconduct. There are also plans to boost the powers of the Australian Securities and Investments Commission (ASIC) to protect Australian consumers from corporate and financial misconduct. These reforms are intended to bring Australia into closer alignment with leading international jurisdictions and to be a credible deterrent to unacceptable misconduct. The announced reforms to ASIC's powers and penalties follow recommendations made by the ASIC Enforcement Review Taskforce. Currently, there is no official timetable for when and how the reforms will be made effective.

The Government will increase and harmonise penalties for the most serious criminal offences under the Corporations Act to a maximum of:

• For individuals – 10 years' imprisonment; and/or the larger of $945,000 or three times the benefits accrued.
• For corporations – the larger of $9.45 million; or three times the benefits accrued; or 10% of annual turnover.

The Government will expand the range of contraventions subject to civil penalties, and also increase the maximum civil penalty amounts that can be imposed by courts, to the maximum of:

• the greater of $1.05 million (for individuals, from $200,000) and $10.5 million (for corporations, from $1 million); or
• three times the benefit gained or loss avoided; or
• 10% of the annual turnover (for corporations).

Further planned developments include the development of ASIC’s power to:

• ban individuals from performing any role in a financial services company where they are found to be unfit, improper, or incompetent;
• refuse, revoke or cancel financial services and credit licences where the licensee is not fit or proper; and
• investigate and prosecute serious offences by harmonising their search warrant powers to provide them with greater flexibility to use seized materials, and granting ASIC access to telecommunications intercept material.

Treasury has released draft regulations and a draft declaration for public consultation. The regulations and declaration support the stay on enforcement of ipso facto clauses against relevant entities. Ipso facto clauses allow parties to enforce a right, and terminate or amend a contract, when their contractual counterparties have entered into formal insolvency, regardless of the counterparties continued performance of their obligations under the contract.

The exposure draft of the Corporations Amendment (Stay on Enforcing Certain Rights) Regulations 2018 and the Corporations (Stay on Enforcing Certain Rights) Declaration 2018 support the reforms in the Treasury Laws Amendment (2017 Enterprise Incentives No. 2) Act 2017 (the Act) which received Royal Assent on 18 September 2017.

The draft regulations and declaration recognise that in some circumstances it is necessary or desirable for ipso facto clauses to continue to operate, for example, where there is an established market mechanism already in place or where it would be a commercial nonsense for an ipso facto clause to be stayed. As a result the draft regulations and declaration include certain exemptions to the ipso facto stay.

The public’s views are sought on the regulations and declaration.  Submissions are due by 11 May 2018.  See Treasury’s website.  See also Minister for Revenue and Financial Services, the Hon Kelly O’Dwyer’s media release.

In its latest move to protect client money, the Treasury has released an exposure draft of the Corporations Amendment (Client Money Reporting Rules Enforcement Powers) Regulations 2018 and related explanatory statement for consultation to seek stakeholder views. The draft regulations complete the Government’s client money reform agenda, designed to strengthen the protection of retail clients of financial services. The regulations follow on the heels of the 4 April 2018 commencement of the amendments to Chapter 7 of the Corporations Act restricting how client money is to be used. See the note on these amendments immediately below.

Specifically, the draft regulations propose to give ASIC tools to enforce the ASIC Client Money Reporting Rules 2017. These rules make Australian financial services licensees more accountable for the way they hold client money.

The Corporations Act already allows ASIC to impose penalties of up to $1 million for breaching the ASIC Client Money Reporting Rules.  The draft regulations simply give ASIC alternatives to civil proceedings: namely, the ability to issue infringement notices and enter into enforceable undertakings with licensees.  The resulting regime will effectively mirror those already operating to enforce ASIC’s market integrity, derivative transaction and trade reporting rules.  Submissions are due by 26 April 2018.  See Treasury’s website.  See also Minister for Revenue and Financial Services, the Hon Kelly O’Dwyer’s media release.

The provisions of the Treasury Laws Amendment (2016 Measures No 1) Act 2017 relating to client money commenced on 4 April 2018.  The amendments are to Chapter 7 of the Corporations Act and significantly restrict the circumstances in which Australian financial services licensees may use client money.  As of 4 April 2018, the client money rules impose record-keeping, reconciliation and reporting obligations on Australian financial services licensees that hold 'derivative retail client money' within the meaning of the Corporations Act, unless the client money relates to a derivative that is traded on a fully licensed domestic market, such as ASX 24.

ASIC has updated Regulatory Guide 212 Client money relating to dealing in OTC derivatives (RG 212) to guide AFS licensees and investors through the client money regime set out in the Corporations Act. This topic is also discussed in the ASIC section below.

The Australian Government has targeted the use of Managed Investment Trusts (MITs) by foreign investors in a reversal of original policy objectives to the introduction of MITs, while couching the proposed package in terms of levelling the playing field.

Unhelpfully, and reflective of the muddle that is the Government’s approach to tax, despite the package being titled “Stapled Structures – Details of Integrity Package”, the package is neither limited to stapled structures nor detailed.  There is a significant level of important detail missing, including how the package will practically apply and how domestic investors will be protected. The measures will apply from 1 July 2019.

Who does the package affect?

The Government’s package released on 27 March 2018 has broad ranging application, despite being couched in relatively narrow terms. It will affect investors including:

• Foreign investors in MITs.  MITs are widely used in real estate, venture capital and private equity investments to attract foreign investors with a definite Australian tax outcome that was more generous than the Australian corporate tax rate (and the highest marginal tax rate for non-corporate investors) – an explicitly stated policy objective of the original MIT rules.
• Foreign pension funds and sovereign wealth funds.  These are significant sources of funds, with Canadian pension funds being some of the largest sectorial investors in Australian infrastructure, from roads to airports to energy assets (including renewable energy).
• Investors (domestic or otherwise) in a cascade of trusts.  A cascade of non-wholly owned trusts could arise in a number of non-tax driven circumstances, but there is no consideration of the purpose, just the outcome.
• Investors (domestic or otherwise) in MITs that invest in agricultural assets.

The lack of detail and consistency in the description of the changes makes it difficult to assess exactly who the measures will apply to.  Investors with any interest in a trust and foreign pension funds and sovereign wealth funds must keep a keen eye out for more details, some of which may well come in the upcoming Federal Budget.

What seems to be clear, though, is that traditional real estate trusts with stapled structures and no (or immaterial) cross charges are unaffected.

Click here to see the G+T Insights article discussing the changes in detail.

The treasury has released an exposure draft and accompanying explanatory material to introduce the Banking Executive Accountability Regime (Size of an Authorised Deposit Taking Institution) Determination 2018 for public consultation.  The draft legislative instrument provides the mechanism to calculate the size of an authorised deposit taking institution (ADI). This calculation will be used in relation to Treasury’s Banking Executive Accountability Regime (BEAR). BEAR is a new heightened accountability regime applying to ADIs and people with significant influence over the conduct and behaviour of ADIs (known as accountable persons). BEAR will have a staggered application and will be effective in relation to large ADIs from 1 July 2018. BEAR will apply to small and medium ADIs from 1 July 2019. The draft legislative instrument provides that:

• a small ADI would have less than or equal to $10 billion on a three year average of total resident assets;
• a medium ADI would have between $10 billion and $100 billion on a three year average of total resident assets; and
• a large ADI would be any ADI with greater than or equal to $100 billion on a three year average of total resident assets.

The consultation process completed on 20 April 2018.  See Treasury’s media release.  See also Treasurer of Commonwealth of Australia, the Hon Scott Morrison’s media release.

Treasury Laws Amendment (2017 Measures No. 5) Act 2018 No. 27 (Cth) (the Act) received Royal Assent on 11 April 2018.  The Act amends the Corporations Act as follows:

• establishes a new licensing regime requiring administrators of designated significant financial benchmarks to obtain a new ‘benchmark administrator licence’ from ASIC;
• gives ASIC powers to make rules imposing a regulatory framework for licensed benchmark administrators and related matters;
• makes manipulation of financial benchmarks a criminal offence and subject to civil penalties, with appropriate penalties attached; and
• provides for the appointment of an additional Commissioner to oversee the work of the Productivity Commission in relation to the evaluation of policies and programs that have an impact on Indigenous persons.

This amending Act is supported by the ASIC Supervisory Cost Recovery Levy Amendment Act 2018 No. 24 (Cth) which adds “benchmark administrator licensees” to the list of entities from which ASIC may recover its regulatory costs.

The Government has released draft legislation and explanatory materials in preparation for the commencement of the fees-for-service regime on 1 July 2018.  The regime is part of the ASIC Industry Funding Model and will be introduced to recover ASIC regulatory costs that are directly attributable to a single, identifiable, entity.  The draft legislation includes proposed fee amounts with actual fee amounts to be finalised once ASIC has undertaken public consultation on its fees-for-service Cost Recovery Implementation Statement.  Fees associated with registry activities are excluded from the scope of the proposal.  Treasury has produced tailored consultation documents enabling stakeholders to see the actual content of the changes including clean and track changes versions of the corporations, credit and superannuation fees tables in the relevant regulations.  Reponses to the consultation can be submitted up until 1 May 2018.  See Treasury website.  See also Minister for Revenue and Financial Services, the Hon Kelly O’Dwyer’s media release.