Stuart Robert (Fadden, Liberal Party) Share this | Link to this | Hansard source

I rise to make a few brief statements in support of the Corporations Legislation Amendment (Financial Services Modernisation) Bill 2009. Ostensibly the bill looks to bring margin lending, trustee companies and promissory notes under nationally uniform regulation in the Corporations Act. The regulation of all financial services in a nationally consistent manner has long been considered a desirable outcome by industry, government and consumers. Indeed, the last Howard government tried to achieve the same ends. Perhaps they were stopped by the intransigence of some of the states. Whether that is the case or not, the good result is that this bill brings the last vestiges under federal control and, more importantly, under the statutory authority’s watch—that being ASIC.

It is disappointing that it takes cataclysmic events in investment and financial losses to achieve end-states that had previously been pushed for. In the recent collapse of Westpoint disaster, debentures provided to retail clients were subject to the Corporations Act, chapter 7, Disclosures and consumer protection provisions, but promissory notes were not, and Westpoint proved to be a disaster for those investing in the promissory note financial products. Of course the massive regulatory problems surrounding margin lending in the collapse of Storm Financial in 2008 have been highlighted to the inquiry by the Parliamentary Joint Committee on Corporations and Financial Services. Being a sitting member of that committee and having attended many of the inquiries, I have noted that the publicly available submissions and the evidence given in public have pointed to a lack of consistency and regulation and to significant confusion over advisers’ and lenders’ responsibilities.

Who was responsible in providing a margin call to consumers? We know that in June 2008, according to Reserve Bank information, there were over 206,000 clients using margin lending facilities. We know that by September 2008 there were something like 2,000 margin calls a day being exercised. Yet, ironically, none were being exercised on Storm Financial customers. Even the Ts and Cs of the bank lenders, like Colonial First State as part of Commonwealth, showed clearly that the bank would provide the margin call to the consumer. There is some indication that the bank had an arrangement with Storm Financial that meant Storm would represent the client. Indeed, clients never received margin calls, were never able to exercise those options, index funds were sold down and $3 billion to $4 billion was lost. Any move to provide a degree of regulation that is sensible and open, that people can look at and understand to avoid huge losses, is certainly a wise move.

The federal regulation of consistent oversight by ASIC can only be a good thing. In terms of actual objectives of the bill with margin lending, there will be a licensing of lenders and advisers, and all will require an Australian financial services licence. There will be a clarification under chapter 7 of the Corporations Act of margin call responsibilities—who is responsible for the margin call, who is responsible to ensure communication, and how that will be achieved to the person receiving the margin call.

Enhanced investor protections are also being put in place, which include responsible lending provisions that are subsequently being put through by regulation. At present I am not across what the regulation is. It would be preferable if this predilection towards regulation would obey, and the legislative instrument—the act itself—would contain, the provisions. However, my understanding is that responsible lending provisions will come about through regulation. There is also a move to standardise disclosure documents, and that is a healthy thing.

The national uniformity with respect to trustee companies will allow companies to operate across multiple state jurisdictions, obviously without the different laws and the complying costs that go with that. It is understanding that financial services cross state boundaries and that they are, indeed, Australian financial services. This is long overdue. Of course, promissory notes will be regulated in the same manner as debentures, and they will be subject to additional disclosure and regulatory requirements.

To be able to stand here and look at the last vestiges of financial services being brought across to the Commonwealth is a great thing for the industry. It is a good thing that margin lending, trustee companies and promissory notes will come under uniform national regulation, especially under chapter 7 of the Corporations Act as it regards regulation and disclosure, and that one statutory authority, in the form of ASIC, will be responsible for compliance and regulatory oversight. As communications break down our state boundaries more and more, we need to look towards nationalising key areas like financial services so that there is one regime in which people operate, one body which provides oversight and one body of legislation which provides the necessary guidance. I commend the bill to the House.

Chris Hayes (Werriwa, Australian Labor Party) Share this | Link to this | Hansard source

I commend the contribution of the member for Fadden. He is a member of the committee that has been looking into Storm Financial and the effect on many lenders when margin calls were made, and that inquiry has turned everybody’s attention to these issues. Through the proposed amendment of the Corporations Act, this government is implementing the reforms necessary to ensure that responsible financial lending and consumer practices are advanced in this country. I commend the Minister for Financial Services, Superannuation and Corporate Law for delivering an amendment bill at this stage. Not only does this step take us closer to the commitments that were made at COAG but it will help ensure the modernisation of a body of financial lending that has for far too long gone unchecked.

The Corporations Legislation Amendment (Financial Services Modernisation) Bill 2009 comes about as a direct recommendation of the Australian Securities and Investment Commission. It is an area of financial services that is not yet adequately regulated by the current corporations legislation. Most importantly, the provisions included in the bill complement ASIC’s existing authority in two areas: margin lending and trustee companies. Not only will the provisions ensure more responsible lending practices and prudent regulation but they will ultimately serve to protect and strengthen consumer protection in these financial services areas. There are substantial benefits to the realisation of these reforms. Their implementation is necessary to give protection to the many who utilise these services but are vulnerable because of inadequate legislation.

The member for Fadden alluded to Storm Financial. That matter is being considered by a parliamentary committee at the moment, but those of us who follow it in the papers would know that over 3,000 people have been affected. People in their retirement were encouraged to take out loans affecting their housing which were subject to a margin call. Three thousand families that thought they were making provision for their retirement and long-term economic security now find themselves very much in the forefront of a financial catastrophe. That catastrophe is not of the making of the economic downturn but a direct result of a margin call being made, as can occur, and those 3,000 families’ exposure was such that they were significantly affected. That is why this is an important and prudent piece of legislation at this time.

Over the past decade the use of margin lending has increased dramatically in Australia and, despite the surge in this type of lending, it has really escaped consumer credit regulation and consequently a gap has occurred. There is no point simply focussing on issues such as Storm Financial. We are all being encouraged to look at ways that we could actually make retirement incomes and security, and I think that is a good thing. What has occurred through this process in the practice of margin lending is that areas have been left with a significant degree of exposure because legislation has not been developed that regulates in that respect of a lending practice.

In implementing the changes the amendments have targeted lenders by requiring both them and their advisers to be licensed. As a consequence, through ASIC, they will be regulated not only now but into the future. Through that process we can at least ensure consistency and a high level of compliance through the licensing arrangements. Licensing components will provide enhanced, comprehensive and consistent protection for consumers entering into margin loans and will encourage the improvement of standards for margin loans offered by lenders.

The proposal also includes provision for guarantees of an enhanced level of responsible lending by preventing lenders from approving unsuitable loans to consumers that may put them at risk of losing their own homes. This new margin loan disclosure document, introduced by these changes, will allow borrowers to be informed in a concise manner of the facts they need to know before entering into such a significant arrangement as a margin loan agreement. This, combined with a dispute resolution process, will actually be able to deliver an independent, expedient and free dispute resolution service. Again, that will act to protect consumers from unnecessary harmful lending practices that have the potential to destroy a family’s future. The government has made extensive efforts to ensure that there is an adequate transition period for the industry and its stakeholders, and a 12-month buffer period has been created to do that.

The second aspect of this legislation, as I indicated at the outset, involves legislation relating to trust property and trustee companies. It will alleviate many of the concerns raised by ASIC by extending the existing powers that apply to these financial products. The extension of their authority will allow ASIC to access vital information relating to trust property and will increase the control over trustee companies. Allowing ASIC to access greater amounts of information, such as details of the persons involved in a transaction about a trust property, will allow better judgments as to whether they pursue a formal investigation. As a result of increasing their control over trustee companies, ASIC will have the authority over the trust property. In certain circumstances this will prevent the disposal of such property.

The other significant aspect is that with the current state based systems, where a trustee company operates in more than one state we find companies being subject to compliance with differing inconsistent authorisations and reporting requirements. By creating a national framework of trustee companies under the authority of ASIC the unnecessary barriers to entry for companies will be eliminated, as well as the compliance costs and burdens associated with that.

The benefits of national regulation will also be felt by consumers. The traditional services of trustee companies will be regarded as financial services, and will fall under the consumer protection and disclosure requirements dictated under the Corporations Act 2001. By binding trustee corporations to existing financial product disclosure, licensing, conduct, advice and dispute resolution, these reforms will all move to significantly protect consumers. I commend the legislation to the House.

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

in reply—I thank the honourable members who have spoken on this Corporations Legislation Amendment (Financial Services Modernisation) Bill 2009, particularly the honourable member for Werriwa. This bill will give effect to the COAG agreement to provide for national regulation of margin lending and trustee corporations. The bill will also make long awaited improvements to the regulatory regime covering the issue of debentures. Until now, margin lending has not been subject to any specific regulatory regime at all. This is a serious issue particularly because non-standard margin loans contain some features that borrowers often find difficult to understand.

As we saw in the fallout from several recent high-profile financial collapses, when investors put their money into sophisticated financial products they do not fully understand they can stand to lose up to hundreds of thousands of dollars and, sometimes, their family home.

Under this bill, lenders and advisers will need to be licensed and regulated by ASIC. Consumers will have access to independent, free and fast dispute resolution services. Importantly, under the new responsible lending requirements, advisers will be required to only provide advice if it is appropriate to the client’s needs and circumstances.

A further consumer protection measure clarifies which party is responsible for notifying borrowers when a margin call occurs where both a lender and a financial adviser are involved. In the past, delays in margin call notifications and disagreements between lenders and advisers contributed to losses suffered by consumers. The new margin loan regime provided for by the financial services modernisation bill represents a major and long overdue improvement in consumer protection.

The second area covered by the bill is the traditional activities of trustee corporations. These include personal trust and deceased estate administration services. Trustee corporations which carry out these tasks are currently regulated by the states and territories, but the regulatory coverage is often inconsistent. Under the Commonwealth system there will be a single licensing regime administered by one single well-resourced regulator, ASIC.

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 these services, trustee corporations will be bound by the financial product disclosure licensing conduct advice and dispute resolution provisions of those acts. This will mean greater transparency for trustee corporations and far better protection for consumers.

The third area covered by the bill is debentures and promissory notes. The bill will amend the regulatory framework in the Corporations Act to align the regulation and promissory notes with debentures and also 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. The amendments will also enhance transparency for debenture holders by creating a publicly available register of debenture trustees. The register will be established and maintained by ASIC.

Since the introduction of the bill on 25 June 2009, there have been some proposed changes which are reflected in the parliamentary amendments I will move in the consideration in detail stage. In relation to margin loans, the amendments address the regulatory gap when an issuer of a margin loan uses a subsidiary or another organisation to sell the loan. Currently, the lenders of a margin lending facility can be exempt from obtaining an Australian financial services licence if they rely on another AFSL holder to meet their legal requirements. If so, they could potentially avoid responsible lending and other conduct obligations. To address this issue, I propose to introduce a regulation mechanism to enable issuers of a margin-lending facility to be removed from the exemption, thereby closing a potential avoidance loophole.

The regulation-making power will provide the flexibility to address different corporate structures in the margin-lending context and potentially other lending arrangements or products at a later stage. The amendments will also clarify the use of the term ‘provider’ in relation to the margin-lending facility.

In relation to trustee corporations, the government is seeking amendments to ensure that ASIC can access certain powers to regulate the industry. The amendments ensure that certain existing ASIC powers are available to it in relation to trust property held by trustee companies.

The amendments replicate or amend, as appropriate, certain existing ASIC powers that apply to financial products, so that they can be used in relation to trust property held by a trustee company. In essence, the amendments allow ASIC to obtain information about trust property outside a formal investigation under part 3, divisions 1 and 2 of the ASIC Act and certain information-gathering powers under part 3 of the ASIC Act. Further, the amendments allow ASIC to make certain orders in relation to trust property in certain circumstances. An anomaly in the ASIC Act in relation to unconscionable conduct in business transactions is also corrected.

In conclusion, by introducing national regulation for margin loans and improving the regulatory framework governing trustee corporations, debentures and promissory notes, this bill will make important changes to the regulatory framework, changes which will bring far greater consistency, clarity and fairness to our consumer credit regulatory regime. I commend the bill to the Main Committee.

Question agreed to.

Bill read a second time.