Australian Regulatory Compliance Review

Austrac enforceable undertakings

AUSTRAC has commenced a new enforceable undertakings regime.

An enforceable undertaking is a written undertaking that is enforceable in a court, given to and accepted by the AUSTRAC CEO. They are generally an alternative to civil or administrative action where there has been a contravention of the AML/CTF Act, the regulations or the AML/CTF Rules.

Austrac's first acceptance of enforceable undertakings are from Barclays Bank PLC and Mega International Commercial Bank Co,. Ltd , following a number of deficiencies and breaches, including reporting breaches,of Australia's anti-money laundering and counter-terrorism financing (AML/CTF) laws.

Barclay's breaches were identified following an on-site assessment.

The undertakings require the companies to:

• review transactions for a period of seven years and provide AUSTRAC any outstanding reports required by law;
• develop and implement proper systems and controls to ensure that the company complies in the future with its reporting and AML/CTF program obligations;
• submit to AUSTRAC an independent expert report detailing the company's compliance with the AML/CTF laws. The companies will also be required to submit similar reports in 2010 and 2011.

Final decision on taxation of employee share schemes

The Assistant Treasurer, Senator Nick Sherry, has released a Policy Statement setting out the final taxation treatment of shares and rights acquired under employee share schemes, effective from 1 July 2009.

Under the arrangements outlined on Budget night in May, all discounts on shares and rights provided under an employee share scheme would be assessed in the income year in which the shares and rights are acquired.

Under the final framework for employee share schemes, the taxation of discounts on shares and rights acquired under an employee share scheme will remain the starting principle of the regime, with concessional treatment available for particular schemes.

The upfront tax exemption will be means tested and tax deferral will only be accessible where there is a real risk that the shares or rights may be forfeited, such as due to performance hurdles or employment conditions. The pre-Budget use of cessation of employment as a taxing point will be retained and the maximum 10 year deferral period will be reduced to seven years.

Modifications to the original announcement are:

• increasing the income tax threshold for eligibility for the upfront tax concessions to $180,000, to align it with the top marginal tax rate threshold;
• providing further clarity on the meaning of "real risk of forfeiture" via the use of explanatory materials and Tax Office materials, including through the use of a range of example cameos to assist industry;
• • Employees receiving benefits under these schemes will not be able to pay tax upfront and the scheme's governing rules must clearly distinguish these schemes from those eligible for the upfront tax exemption.
• moving the deferred taxing point from a point at which the taxpayer will no longer have a real risk of losing the share or right to a point at which:
• • in the case of shares, there is both no longer a real risk of the taxpayer losing the share and no restriction (present at acquisition) preventing the taxpayer from disposing of the share; and
  • in the case of rights to shares (options), there is both no longer a real risk of the taxpayer losing the right and no restriction (present at acquisition) preventing the taxpayer from either disposing or exercising of the right, however, if after exercising the right, the underlying share is subject to forfeiture and restrictions preventing the taxpayer from disposing of the underlying share, it is the point at which there is both no longer a real risk of the taxpayer losing the share and no restriction (present at acquisition) preventing the taxpayer from disposing of the share.
• allowing the deferral of tax in relation to up to $5,000 worth of shares under particular salary sacrifice based employee share schemes, where there is no real risk of forfeiture.
• removing the reporting requirement for employers to report the market value of employee share scheme benefits in the year of grant, if this is not the year in which the employee is taxed; and
• establishing a three part forward plan of consultation with industry by:
• • asking the Board of Taxation to examine two remaining issues (a) how best to determine the market value of employee share scheme benefits; and, (b) whether shares and rights under an employee share scheme that are provided by start-up, research and development and speculative-type companies should be subject to a tax deferral arrangement, despite not being subject to a real risk of forfeiture;
  • commit to an Exposure Draft process of the Bill to ensure the policy is accurately reflected in the application of the law, including consultation on a range of technical issues raised in submissions that will be contained in the Exposure Draft Bill; and
  • supplementing this process by asking the Board of Taxation to consult with stakeholders  to examine technical matters associated with the implementation of these reforms, and to report to Government in time to allow the Board's views to be taken into account in the draft legislation.

A full reporting regime will also be introduced to significantly boost the integrity of the taxation of share schemes.

The combination of these final reforms and the measures out in the 5 June, 2009 consultation paper are set out in the attached Policy Statement.

As previously announced, the existing law will apply to all shares and rights acquired before 1 July 2009. The Government will introduce the legislation during the Spring Sittings of Parliament.

ASIC identifies financial report focus areas

ASIC has highlighted a number of areas on which company Boards and those responsible for the preparation of financial reports should focus in the upcoming reporting period.

It has identified going concern (solvency), valuation of assets and off-balance sheet arrangements as issues for concern.

New legislation review

Parliament is on a winter break and will next sit from 11 to 20 August 2009.

It's left us with some significant new Bills to review:

• Australian Consumer Law and Trade Practices Amendments
• National Consumer Credit Reform Package
• Personal Property Securities
• Financial services modernisation: margin loans, trustee companies and debentures
• Director and executive termination payment changes

On 1 July we'll have:

• tax changes
• changes to superannuation contributions concessions
• new unfair dismissal rules under the Fair Work Act

And we're waiting for:

• assent and commencement of the anti-cartel laws;
• a decision on the new rules for employee share schemes.
• further updating on COAG's reform program.

Financial services regulation: margin loans, trustee companies and debentures

The Minister for Financial Services, Superannuation and Corporate Law, Chris Bowen MP,has introduced the Corporations Legislation Amendment (Financial Services Modernisation) Bill 2009 into Parliament.

The Bill addresses three key areas of financial services regulation:

• Margin lending
• Trustee companies
• Debentures and promissory notes

Margin lending

The new regime will make margin loans subject to the investor protection regime in the Corporations Act. It requires margin lenders and advisers to obtain a licence and be subject to supervision and enforcement by ASIC. It will also give borrowers access to free external dispute resolution services where they have a dispute with their provider.

Margin loan lenders will be subject to responsible lending requirements which will only allow them to provide a margin loan if they are reasonably sure that the borrower is able to afford the loan without suffering substantial hardship. A new provision is included which clarifies whether lenders or financial advisers are responsible for notifying borrowers of margin calls. There will be a 12 month transition period.

Trustee companies

The Commonwealth assumes responsibility for the regulation of trustee companies under a single, standard, national regulatory regime.

Traditional trustee company services will be regarded as financial services under Chapter 7 of the Corporations Act, and trustee companies will be required to hold an Australian financial services licence covering the provision of the relevant services.

The amendments will also protect consumers by establishing a national consumer protection and disclosure regime under the Corporations Act and the ASIC Act. Trustee companies will also need internal and external dispute resolution mechanisms to resolve complaints.

The legislation provides that fees must be fully disclosed to the public via the internet. Fees charged to non-charitable trust clients are limited to the trustee company's latest published schedule of fees.

Also, fees charged to charitable trusts and foundations will be regulated to ensure that beneficiaries of these trusts are protected. Specifically, fees charged to "new client" charitable trusts will remain subject to capping based on the Victorian Trustee Companies Act 1984. "Existing client" charitable trusts will have their fee levels frozen to ensure the fees do not rise as a result of the new regime.

Debentures

The Bill amends the regulation of debentures and promissory notes and creates a register of debenture trustees.

The changes harmonise the legal regime to require all retail debentures and promissory notes to be subject to the consumer disclosure and protection measures currently applying to debentures. This includes the requirement to have a trust deed and trustee arrangements, and to issue a full prospectus.

ASIC will be required to create and maintain the register of debenture trustees, which will be available for viewing by the public.

AUSTRAC Typologies and Case Studies Report 2009

AUSTRAC has issued a new typologies report which outlines some of the latest money laundering methods and other financial crimes in Australia.

The AUSTRAC Typologies and Case Studies Report 2009 presents a range of case studies that highlight illicit activities.

The report also features many 'red flag' indicators of suspicious customer behaviour, and crimes including card skimming, early release super schemes, Ponzi schemes, 'boiler room scams', and internet, lottery and sweepstake scams.

National Consumer Credit Protection Reform Package introduced

The Minister for Financial Services, Superannuation and Corporate Law, Chris Bowen MP, has introduced the Government's national consumer credit laws into Parliament.

The regime will establish a single, standard, national law for the regulation of consumer credit.

The new national regime includes:

• a national licensing regime regulating credit providers and providers of credit related services enforced by the Australian Securities Commission (ASIC) as the sole regulator (from 1 January 2010);
• responsible lending requirements (from 1 January 2011);
• compulsory dispute resolution mechanisms for credit providers;
• extension of consumer credit laws to residential investment property loans;
• an increase to the threshold for hardship claims to $500,000.

The Reform Package comprises three Bills:

• the National Consumer Credit Protection Bill 2009 (Credit Bill) which contains the licensing provisions and new National Credit Code (replacing the existing Consumer Credit Code);
• the National Consumer Credit Protection (Transitional and Consequential Provisions) Bill 2009 (Transitional Bill); and
• the National Consumer Credit Protection (Fees) Bill 2009 (Fees Bill).

Subject to the passage of the Reform Package and reference legislation in each state, the Reform package will commence on 1 November 2009:

• Lenders and credit-service providers (such as brokers) will be required to register with ASIC between 1 November 2009 and 31 December 2009, and will have to apply for a licence by 30 June 2010 in order to continue to engage in credit activities.
• The responsible lending conduct obligations will commence on 1 January 2011 to provide industry time to put in place the systems, arrangements and training needed to comply with these obligations.

Langes is currently reviewing the draft bills in detail.

We will be discussing the legislation at our seminars in Brisbane, Sydney, Melbourne and Adelaide in August.(More information here).

Links:Treasury's Consumer Credit Website

Langes National Consumer Credit Reform website

ASIC;s National Consumer Credit Regulation page

Private Ancillary Funds: new tax guidelines for private philanthropy

The Assistant Treasurer, Senator Nick Sherry, has introduced into Parliament the Tax Laws Amendment (Measures No 4) Bill 2009, which establishes a new legal framework for prescribed private funds from 1 October 2009.

Prescribed private funds, which are now to be known as Private Ancillary Funds (PAFs), are a type of fund designed to encourage private philanthropy by providing businesses, families or individuals with greater flexibility to start and run their own trust funds for philanthropic purposes.

The Assistant Treasurer has also released for consultation the detailed draft Guidelines on how the new PAF framework will apply.

The Bill contains three important changes to the earlier Exposure draft Bill, namely:

• allowing multiple corporate trustees of PAFs;
• reducing potential compliance costs by amending the requirement that transitional PAFs must have a single corporate trustee; and
• widening the scope of the defence available to PAF trustees and directors from being jointly and severally liable to administrative penalties.

The Bill also moves the full administration of PAFs under the authority of the Commissioner of Taxation, gives the Treasurer the power to make legislative guidelines about the establishment and maintenance of PAFs, and gives the Commissioner of Taxation the power to impose administrative penalties on trustees that fail to comply with the guidelines, and power to remove or suspend trustees of non-complying funds.

The draft Guidelines released today contain the following key reforms:

• replaces the existing complex rules based on accumulation targets with a simpler minimum annual distribution rate for funds, proposed to be set at 5 per cent, being a rate the Government considers to strike the right balance between ensuring resources flow to the charitable sector now, whilst also allowing PAFs to grow for the benefit of the sector in the future;
• a requirement that funds develop and maintain an investment strategy, which requires consideration of investment objectives and risk;
• the introduction of valuation rules that seek to minimise the compliance costs associated with making regular valuations; and
• a requirement, in lieu of setting a minimum fund size, that trusts distribute at least $11,000 per year unless the expenses of the fund are met from outside the fund, to ensure philanthropists have the freedom to establish smaller trusts whilst protecting funds from being eroded by expenses.

Director, managerial and executive termination benefits

The Government has introduced the Corporations Amendment (Improving Accountability on Termination Payments) Bill into Parliament.

It inserts new sections 200AA and 200AB in the Corporations Act and amends sections 200A-G and J relating to the payment of termination benefits to company directors and executives.

The Corporations Act currently allows for termination benefits up to seven times a director’s total annual remuneration package before shareholder approval is required. Additionally, only company directors’ termination benefits are subject to shareholder approval.

If passed, termination benefits for company directors and executives exceeding one year’s average base salary are subject to shareholder approval. In addition, the range of personnel whose termination benefits can be subject to shareholder approval is expanded from directors to also include senior executives or key management personnel. The Bill also clarifies the types of benefits that are subject to shareholder approval

The new rules will not apply retrospectively to existing contracts. The new arrangements will apply to contracts that are entered into and renewed or extended.

The new rules will also apply to existing contracts for which a variation of a condition is made. Minor changes to an existing contract would not be considered a variation of a condition. However, changes that effect an essential term, including any term relating to remuneration would be considered a variation of a condition.

Australian Consumer Law introduced

The Government has introduced the Trade Practices Amendment (Australian Consumer Law) Bill 2009 into Parliament.

If passed, the Bill will amend the Trade Practices Act 1974 by adding the Australian Consumer Law dealing with unfair contract terms as a schedule to the Act.

It also introduces new penalties, enforcement powers and consumer redress options in the Trade Practices Act and amends the consumer protection provisions of the Australian Securities and Investments Act 2001. to make them consistent with the Trade Practices Act and the Australian Consumer Law.

Further provisions will be included in the Australian Consumer Law by means of a second Bill to be introduced in early 2010. All Australian jurisdictions will be required, in accordance with the National Partnership Agreement to Deliver a Seamless National Economy to apply the full Australian Consumer Law by 1 January 2011.

UPDATE 25 June:Treasury has set up an Australian Consumer Law website.