Regulation overkill comes full circle

“…[E]xcessive regulation, problematic implementation and unwarranted litigation – particularly when occurring simultaneously – make US capital markets less attractive and, therefore, less competitive with other financial centers around the world.” US Committee on Capital Markets Regulation in its Interim Report, Nov. 2006

This quote sums it up – regulators in the US have bitten more than what they can chew.

It could not have been more coincidental. The US Committee on Capital Markets Regulation (US Committee) issues its interim report on “Capital Market Regulation” and several Australian governments issue even more reports on regulation:

Commonwealth “Corporate and Financial Services Regulation Review” – a proposals paper by the Australian Federal Government (Proposals Paper);
New South Wales “Investigation into the burden of regulation in NSW and improving regulatory efficiency” – a final report in October 2006 by the NSW Independent Pricing and Regulatory Tribunal; and
Victoria “Reducing the Regulatory Burden: The Victorian Government’s Plan to Reduce Red Tape” – an initiative of the Government of Victoria.

In the wake of the above three Australian papers comes the Media Release of 6 December 2006 from the Federal Minister of Revenue and the Assistant Treasurer that amendments will be introduced to the integrity rules concerning Division 7A of the Income Tax Assessment Act 1936 (Cth), with the view to reducing compliance costs for taxpayers.

The US Committee identified the following four factors as contributing to the decline in recent interest in US capital markets:

financial regulation;
Sarbanes- Oxley Act, especially the compliance obligations under section 404;
class- action litigation; and
shareholder rights.

The US Committee recognised the following disturbing trends in capital markets in the recent past:

5% of the value of global initial public offerings was raised in the US last year, compared to 50% in 2000;
the US share of total equity capital raised in the world’s 10 top countries has declined to 27.9% so far this year from 41% in 1995;
the decrease in US listing premiums erodes the traditional edge maintained by the US on cheaper cost of capital;
private equity firms, almost non-existent in 1980, sponsored more than US$200 billion of capital commitments last year alone;
since 2003, private equity fundraising in the US has even exceeded net cash flows into mutual funds and going private transactions have accounted for more than a quarter of publicly announced takeovers. The increased use of private markets disadvantages the average investor, who typically cannot participate in such markets; and
the dramatic increase in the use of private US markets is important evidence that regulation and litigation are keeping them out of the public market.

The US Committee recommends that regulatory authorities should adopt a more risk-based process weighing the outcome benefits against the cost of compliance for businesses.

The position in Australia has been that the Federal Government and the Australian Securities and Investments Commission (ASIC) have been regularly consulting stakeholders and improving corporate governance and provision of financial services. The Proposals Paper is aimed at “simplifying the regulatory system and reducing unnecessary or excessive red tape”. This follows a consultation paper released in April 2006.

Overviewed below are some of the significant changes in the Proposals Paper for Australian financial services law.

Commonwealth Government Proposal Paper | “Corporate and Financial Services Regulation Review”

1. Definition of financial advice

Financial advice can be “general” or “personal’ advice. Anyone providing financial advice is subject to the licensing, training and disclosure requirements in Chapter 7 of the Corporations Act 2001 (Cth) (Act).

Personal advice is given when a financial service provider uses personal information and product information to make a recommendation to a client. If personal advice is given, the licensee is required to provide a Statement of Advice to the client. The current definition of personal advice encompasses various situations when recommendation is made to a client eg: a person recommends anyone of several products that may be provided by that person. This is merely a sales function and not providing financial advice.

The proposal will allow providers of financial products to be able to recommend financial products (sales recommendation) based on clients’ objectives, financial satiation and needs without the recommendation being classified as financial advice . The proposal will include conditions to be satisfied before a financial services provider will be able to us the sales recommendation situation.

2. Statement of Advice

The proposal is to remove the need to provide a Statement of Advice in situations where personal financial advice is given to a retail client, where there is no recommendation made and no remuneration is received for the advice. This proposed change will apply where:

personal advice is provided but the advice:
- does not contain any recommendations relating to a specific financial product or products of a specific product issuer; or
- the advice is only that the client continue to hold an existing financial product;

the adviser does not receive any remuneration in respect of the recommendation ; and
the provider keeps a Record of Advice and the client is able to obtain a copy of the Record.

3. Threshold for Statement of Advice

It is the requirement under the law that anyone providing personal advice should give a Statement of Advice setting out the advice provided. This may have some unintended consequences, especially when the advice sought is minor or the funds to be invested is small.

The proposal intends to introduce a threshold requirement for Statement of Advice so that a full Statement of Advice will be required only if advice is given in relation to an investment that is above A$10,000, except in the case of superannuation. A Record of Advice will have to kept in case of advice in respect of investment below the threshold amount.

4. Sophisticated investors

Additional information is required to be provided if a client is classified as retail client as opposed to a wholesale client. Under the definition of a retail client as it appears in the law currently, some of the clients who would wish to treated as wholesale clients will still be considered as retail clients, thus inserting an unnecessary disclosure obligation.

The proposal will insert the “sophisticated investor” provisions appearing in Chapter 6D of the Act, which deals with fund raising.

Under the proposal , a determination of wholesale status will be made if the licensee is satisfied that the person to whom the offer is made has previous experience enabling the person to make a knowledgeable decision.

5. Registered schemes investing in unregistered schemes

The proposal is to remove the prohibition in section 601 FC(4) of the Act, that disallows a registered scheme from investing in unregistered schemes.

There will be changes to training requirements as a consequence of other proposed changes.

Apart from changes to the law relating to financial services, the Proposals Paper deals with changes that may be introduced to simplify company reporting obligations, auditor independence obligations, corporate governance, fundraising, takeovers and compliance in general. Regulation has come full circle.

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Noric Dilanchian

Noric Dilanchian is a lawyer, author and educator practising in areas of business law for almost four decades, with a focus on contract drafting and review, and the commercialisation of content, technology, digital assets and intellectual property. Linked In |YouTube

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