Chris Bowen (Prospect, Australian Labor Party, Minister for Financial Services, Superannuation and Corporate Law) Share this | Link to this | Hansard source

I move:

That this bill be now read a second time.

The Corporations Legislation Amendment (Financial Services Modernisation) Bill 2009 will amend the Corporations Act 2001 to provide for the national regulation of margin lending and trustee corporations, as agreed by COAG.

Consumers will also benefit from long-awaited improvements to the regulatory regime governing the issue of debentures.

The first of the three elements of the financial services modernisation bill is the introduction of national regulation of margin loans.

While the level of margin lending has dropped over the last 12 months due to the global recession, over the last decade the use of margin lending has increased dramatically. In June 1999, less than $5 billion had been borrowed through margin loans. But by December 2007 that figure had sky-rocketed to over $37 billion. That’s more than a 700 per cent increase.

Over the past 12 months, in the fall-out from several high-profile financial collapses, many investors lost hundreds of thousands of dollars due to margin loans. And in some cases, they even lost their family homes.

While properly-geared margin lending, backed by full disclosure, does have a place in our financial services landscape, we cannot tolerate ordinary Australians being misled into grossly inappropriate margin loans that can cost a family everything they own.

Margin lending has not been subject to the credit regime operated by the states. In fact, until now, margin loans have not been subject to any specific regulatory regime at all.

For the first time, margin loans will become subject to specific legislation designed to protect consumers from harmful lending practices.

As margin loans are generally used to finance investments in listed and unlisted securities, the decision has been made to regulate them as part of the financial services regime in chapter 7 of the Corporations Act.

This means that margin loan borrowers will benefit from the general investor protection regime contained in that legislation.

This includes a number of important measures. For example, lenders and advisers will have to be licensed and regulated by ASIC.

Consumers will have access to independent, free and fast dispute resolution services.

And importantly, advisers will be required to only provide advice that is appropriate to the client’s needs and circumstances.

Consumer protection in relation to margin loans will be further improved through two specific measures.

The first is a responsible lending requirement, which is designed to prevent lenders from giving unsuitable loans to consumers.

Before giving a margin loan, lenders will be required to consider whether the borrower could suffer substantial hardship as a result of taking out the loan. If that is the case, the law says that the loan must not be provided.

The regulations which will accompany the legislation will provide further detail of what lenders will need to consider. Among other things, a specific requirement will be included for lenders to consider whether consumers will be at risk of losing their homes as a consequence of taking out a margin loan.

The regulations will also require financial advisers to consider the same matters, including the possible loss of the borrower’s home, when providing advice on margin loans to consumers.

The second specific measure clarifies which party is responsible for notifying borrowers when a margin call occurs where both a lender and a financial adviser is involved. In the past, delays in margin call notifications due to disagreements between lenders and advisers have contributed to losses suffered by consumers.

The government has consulted extensively during the process of developing the policy underlying the legislation.

A margin loan consultation group was established consisting of industry associations, major lenders and other stakeholders such as lawyers and external dispute resolution schemes.

Regular meetings were held with this group while the policy was being developed. The group also had the opportunity to review draft legislation before it was exposed for public comment.

Some important changes were made in response to views expressed by stakeholders during consultation.

In particular, transitional periods have been extended to give industry stakeholders, especially lenders, more time to prepare for the introduction of the new regime.

The new margin lending regime will apply to margin lenders and advisers 12 months after the legislation comes into force. This transitional period will give industry sufficient time to prepare for the introduction of the new regime, in particular the new responsible lending requirements.

The government understands that appropriate preparations are needed for the implementation of the new regime, and has listened to industry views on how long the transitional period should be.

I am also confident that ASIC will be looking at ways to minimise the regulatory burden to business during and after the transitional period.

Ways to achieve this could include ASIC releasing guidance on the detailed implementation of the provisions in the law, and providing appropriate relief from unintended consequences of the law.

I would add that the new legislation, as well as the existing Corporations Act, gives ASIC a wide range of powers in this respect.

In addition to the measures I have just outlined, a new margin loan disclosure document is being designed. This document will inform potential borrowers in concise and clear language of the key factors they need to consider before they take out a margin loan.

This document is currently being designed in close cooperation with margin lenders and other stakeholders and will be separately introduced through regulations at a later date.

The new margin loan regime represents a major improvement in consumer protection in an area which, in the past, has been subject to, at best, loose and patchy regulatory coverage.

Turning now to the second area covered by the financial services modernisation bill, it will provide for Commonwealth regulation of the ‘traditional activities’ of trustee corporations.

The term ‘traditional services’ covers several personal trust and deceased estate administration services, such as acting as a trustee of a trust, applying for probate of a will or acting as executor of a deceased estate. Trustee corporations carrying out these tasks are generally currently regulated by the states and territories.

There are several reasons why the current state-based authorisation of trustee companies needs to be replaced. Trustee companies that wish to operate in more than one jurisdiction must comply with differing and often inconsistent authorisation and reporting requirements. The state system lacks transparency and, where an applicant has been refused or not accepted, the reasons for rejection have been unclear.

This framework imposes unjustifiable barriers to entry on trustee companies, as well as unnecessary compliance costs and burdens.

Under the Commonwealth system, there will be a single licensing regime administered by one single, well resourced regulator—ASIC.

These changes will lead to a national market for trustee company services and significant efficiencies and savings in terms of start-up costs.

The state-based system also creates inconsistent outcomes for ‘consumers’ of trustee company services.

As a starting point, consumers are entitled to know that their service provider is providing services that are efficient, honest and fair, that it has adequate resources to carry out its functions, that it provides cost-effective dispute resolution and that it has adequate compensation arrangements. While some state systems meet some of these criteria, others do not.

Under the financial services modernisation bill, the ‘traditional services’ of trustee corporations will be deemed to be ‘financial services’, and will be covered by the consumer protection and disclosure requirements of the Corporations Act 2001 and the ASIC Act 2001. This will ensure that, in providing those services, trustee corporations will be bound by the financial product disclosure, licensing, conduct, advice and dispute resolution provisions of those acts.

And overall consumer protection will be greatly enhanced.

The government is aware of the need to protect charitable trusts by regulating the fees they may be charged by trustee corporations. It is proposed to ‘grandfather’ the fees charged to existing charitable trusts and foundations. Thus, if the fees of the charitable trust would be increased due to the introduction of a new fee regime, the grandfathering provision would require that client to be charged as if they were still covered under the old rules.

It is proposed to maintain caps on the fees and commissions charged by trustee corporations to charitable trusts that are new clients, in line with the fee regime set out in the Victorian Trustee Companies Act 1984. These arrangements will be reviewed after two years. There will be full disclosure of the corporations’ current fees on the internet.

Due to the need for further consultation, the financial services disclosure regime for trustee corporations does not form part of this bill, but will be developed in regulations.

The bill also amends the regulatory framework in the Corporations Act governing the issue of debentures and promissory notes.

The amendments, which align the regulation of promissory notes with debentures, provide additional protection for investors by removing uncertainty in the law. This is a much-needed change following the collapse of Westpoint, which tried to use the issue of promissory notes with face values of at least $50,000 to avoid the operation of the law.

Under the amendments, all promissory notes issued to retail clients will be subject to the same regulatory regime as debentures, requiring the issue of a trust deed, the appointment of a trustee and the issue of a prospectus. Although thousands of investors incurred substantial losses through the Westpoint collapse, the previous government failed to act on this important issue.

The amendments also enhance transparency for debenture holders by creating a publicly available register of debenture trustees which will be established and maintained by ASIC.

The Ministerial Council for Corporations was consulted in relation to each of these amendments.

The amendments in the bill in relation to the regulation of trustee corporations were the subject of consultations with state and territory representatives. This consultation included consideration of the draft amendments by the Ministerial Council for Corporations.

During that process, some state and territory ministers raised some issues which the Commonwealth will consider further. However, the council has approved the amendments for introduction, as required under the Corporations Agreement.

Full details of the measures in the bill are contained in the explanatory memorandum.

I commend this important bill to the House.

Debate (on motion by Mr Randall) adjourned.