QUANTUM WARRANTS PTY LTD

Transcription

1 QUANTUM WARRANTS PTY LTD submission made to the Corporations and Financial Services Division The Treasury with respect to the proposed Corporations Amendment Regulations 2010 (No.) (proposed Regulations) 25 June 2010

2 1 Background of the contributors (a) Peter Gribble - Quantum 1.1 Peter Gribble is the director and owner of Quantum Group, a leading investment group that provides a complete range of financial advisory and funds management services to institutional investors and professional individuals. Quantum services includes a wide range of specialised services to the Self Managed Superannuation Fund market. 1.2 Quantum has been advising clients since Quantum has established over 21 public property syndicates since 1994, under Managed Investment Schemes (MIS) under an Australian Financial Services License (AFSL) issued to Quantum Funds Management Limited, which acts as the responsible entity for these schemes. 1.3 In 2004 Quantum worked on the first property instalment warrant, and in May 2005, Quantum was issued the first property warrant ATO product ruling, Product Ruling PR 2005/27 entitled Income tax: tax consequences of investing in QuantumWarrants Product Disclosure Statement (withdrawn) (b) Denis Barlin SBN Lawyers Pty Ltd 1.4 Denis Barlin is a director of SBN Lawyers Pty Ltd. With a particular focus on the small to medium sized enterprise market, Denis advises on all aspects of revenue laws, including income tax, capital gains tax, goods and services tax and State taxes generally including stamp duties and land tax. 1.5 As well as taxation, Denis provides advice on trust law matters generally and superannuation. Denis has been heavily involved with the gearing of superannuation fund process from before the introduction of subsection 67(4A) of the SIS Act. 1.6 Denis has been a regular speaker for professional associations such as the Taxation Institute of Australia and has been a regular contributor to a number of professional journals.

3 2. Submission Quantum Warrants Pty Ltd ( Quantum ) agrees with the policy approach contained in the draft Corporations Amendment Regulations 2010 ( the Draft Regulations ). Quantum: A. agrees that dealing with (including recommending, advising and issuing) subsection 67(4A) of the Superannuation Industry (Supervision) Act 1993 (Cth) ( the SIS Act ) arrangements should require (amongst other things): a. the adviser to provide a Statement of Advice; b. the adviser to comply with the know your client rule; c. the adviser to be properly licensed, and have knowledge of derivatives products; d. advisers to be participants in appropriate dispute resolution systems (such as the Financial Ombudsman Service); e. advisers and the market relating to such arrangements to be properly supervised by the Australian Securities and Investments Commission; and f. advisers to have appropriate professional indemnity insurance / compensation arrangements; B. agrees that subsection 67(4A) of the SIS Act arrangements should not be considered credit facilities. C. submits that a new regulation be inserted pursuant to subsection 761D(2) of the Corporations Act 2001 (Cth) so as to make it clear that subsection 67(4A) of the SIS Act arrangements are not only financial products, but that they are derivatives. D. submits that it should be made clear that dealing with (including recommending, advising and issuing) subsection 67(4A) of the SIS Act arrangements should require a proper disclosure of risks via (and amongst other things) a Product Disclosure Statement. E. considers that requiring advisers to hold a derivatives advise designation will not cause inconvenience to advisers. Quantum considers that if not already licensed, competent advisers would easily obtain the appropriate educational requirements and obtain an extension to their licence, or gain access to a derivatives licence via a corporate authorised representative arrangement. F. understands that extending an advisers licence to cover derivatives has minimal professional indemnity insurance implications. Indeed, Quantum has obtained advice from Gallagher Broking Services (a leading Australian insurance broker) that has confirmed that none of the insurance policies that they place which relate to financial planners have any exclusions or special conditions governing the use of derivatives. Gallagher has also confirmed to Quantum that a leading insurer of financial planners (i.e. Chartis) do not generally impose any special conditions with respect to derivatives. As a result, Quantum rejects the argument that advisers will face difficulties in arranging appropriate professional indemnity insurance if subsection 67(4A) of the SIS Act arrangements are classified as derivatives.

4 3. Overview 3.1 Quantum agrees with the policy approach contained in the Draft Regulations, which proposes to insert into the Corporations Regulations 2001 (Cth) ( the Corporations Regulations ) new: Regulation H paragraph [1] of the Draft Regulations; Regulation (2A) paragraph [2] of the Draft Regulations; Regulation AB paragraph [4] of the Draft Regulations. 3.2 We note that paragraph [3] of the Draft Regulations proposes to omit Regulation B of the Corporations Regulations. Quantum does not express a view in this submission as to the omission of that Regulation. 3.3 Quantum agrees with the proposed changes contained in the Draft Regulations. Quantum agrees that arrangements which comply with subsection 67(4A) of the SIS Act carry a degree of risk. In order to mitigate that risk, the consumer protection provisions in the Corporations Act 2001 (Cth) ( the Corporations Act ) should apply. In particular, Quantum agrees that, with respect to subsection 67(4A) of the SIS Act arrangements: the arrangements should be characterised financial products, and in particular a derivative ; anyone involved with advising or dealing with such arrangements should either have an Australian financial service licence (or be an authorised representative of a licensee) with the conditions of the licence relating to derivatives ; and investors in such arrangements should obtain proper disclosure of the risks and costs referable to the arrangement, with such disclosure including a Product Disclosure Statement. 3.4 Quantum agrees that given the nature of subsection 67(4A) of the SIS Act arrangements, and the underlying policy with respect to the prudential regulation and protection of superannuation and retirement savings, the consumer protection relief contained in Chapter 7 of the Corporations Act should apply to such arrangements. Indeed, protections such as the requirement that Australian financial services licensees have dispute resolution systems (section 912A of the Corporations Act) and compensation arrangements (section 912B of the Corporations Act). 3.5 Quantum however considers that the Draft Regulations should contain the following amendments: a new regulation be inserted pursuant to subsection 761D(2) of the Corporations Act which make it clear that subsection 67(4A) of the SIS Act arrangements are not only financial products, but that they are derivatives ; and

5 3.5.2 it should be made clear that dealing with (including recommending, advising and issuing) subsection 67(4A) of the SIS Act arrangements should entail proper disclosure of risks via (and amongst other things) a Product Disclosure Statement. 4. The proposed Regulation H contained in the Draft Regulations 4.1 Chapter 7 of the Corporations Act prescribes certain disclosure and other requirements for the sale and issue of financial products other than securities. Most of the disclosure requirements are contained in Part 7.9 of Chapter 7 of the Corporations Act. Broadly speaking, the aim of the regime is to protect members of the public who acquire financial products (other than securities) by requiring the disclosure of certain material information with respect to the offer or sale of financial products. Further, the provisions attempt to ensure that the material information is provided in written form before a decision to acquire a financial product is made. 4.2 As an overview of Part 7.9 of Chapter 7 of the Corporations Act: Requirement Authority Outline of requirement Product Disclosure Statement Division 2 of Part 7.9 (ss 1011A and following) Prepare and provide disclosure in the form of a Product Disclosure Statement in connection with the sale or issue of a financial product Additional disclosure s. 1017A Provide additional disclosure on the request to a person interested in acquiring a financial product. Continuous disclosure 1017B Provide ongoing disclosure of material changes or significant events while a person holds a financial product. Periodic reporting 1017C, 1017D and 1017DA Provide periodic reporting to holders of certain financial products Dealing with application monies 1017E Hold monies in a trust account pending issue of a financial product. Transaction confirmation 1017F Provide confirmation of transactions (such as acquisitions and disposals) in relation to financial products. Dispute resolution 1017G Establish dispute resolution procedures. Advertising 1018A and 1018B Observe certain restrictions on advertising financial products. Cooling off 1019A and 1019B Allow a customer 14 days to return a financial product and obtain a return. 4.3 Quantum agrees with the approach taken with respect to the proposed changes to the Corporations Regulations. Specifically, Quantum agrees that members of the public who obtain advice with respect to, or invest in subsection 67(4A) of the SIS Act arrangements,

6 should obtain the consumer protection measures contained in Chapter 7 of the Corporations Act. 4.4 Paragraph 764A(1)(m) of the Corporations Act provides that: Subject to Subdivision D, the following are financial products for the purposes of this Chapter... anything declared by the regulations to be a financial product for the purposes of this section. 4.5 The proposed Regulation H intends to provide that subsection 67(4A) of the SIS Act arrangements are a financial product declared pursuant to paragraph 764(1)(m) of the Corporations Act. 4.6 Whilst Quantum agrees that subsection 67(4A) of the SIS Act arrangements should be considered financial products, and given the proposed Regulation AB (i.e. requiring a derivatives licence), we consider that a Regulation should be inserted pursuant to 761D(2) of the Corporations Regulations to provide that subsection 67(4A) of the SIS Act arrangements are in fact derivatives. 4.7 Paragraph 764A(1)(c) of the Corporations Act provides that a derivative is a financial product. The term derivative for the purposes of paragraph 764(1)(c) of the Corporations Act is defined in section 761D of the Corporations Act (via section 761A of the Corporations Act). 4.8 Subsection 761D(1) of the Corporations Act provides that in order for an arrangement to meet the definition of derivative, three conditions must be satisfied: the person must or may be required to provide consideration in the future, that consideration being of... a particular kind or kinds... which would cover both cash or physical delivery; the future time is not less than one (1) business day after the arrangement has been entered into (unless it is a foreign exchange contract, in which case it is three (3) business days); and the consideration or value of the arrangement is determined by reference to... something else (of any nature whatsoever and whether deliverable or not)... which might be an asset, a rate such as an interest rate or exchange rate, an index or a commodity. 4.9 Subsection 761D(3) and (4) of the Corporations Act provides exemptions from the definition of derivative contained in subsection 761D(1) of the Corporations Act. Broadly speaking (and relevantly) the exemption to the definition of derivative will apply if: the transaction relates to the sale or purchase of tangible property; the arrangement does not permit the seller s obligations to be wholly settled in cash or by set-off rather than delivery; and

7 4.9.2 that usual market practice does not permit the seller s obligation to be closed out by matching There is a possibility that certain subsection 67(4A) of the SIS Act arrangements fall within the exemption from the definition of derivative contained in subsection 761D(3) of the Corporations Act. As a result, Quantum respectfully requests that the Corporations Regulations be amended so as to ensure that subsection 67(4A) of the SIS Act arrangements are considered derivatives Subsection 761D(2) of the Corporations Act provides that without limiting the operation of subsection 761D(1) of the Corporations Act,... anything declared by the regulations to be a derivative for the purposes of this section is a derivative for the purposes of this Chapter. A thing so declared is a derivative despite anything in... subsection 761D(2) and (3) of the Corporations Act It seems that the intention with respect to the insertion of the proposed Regulation AB is to require an adviser (i.e. a person issuing, recommending or selling) a subsection 67(4A) of the SIS Act arrangement to be licensed with respect to derivatives As a result, Quantum considers that the Corporations Regulations should be amended (probably by amending Regulation of the Corporations Regulations) by ensuring that subsection 67(4A) of the SIS Act arrangements are derivatives pursuant to subsection 761D of the Corporations Act and therefore a financial product pursuant to paragraph 764A(1)(c) of the Corporations Act. 5. The proposed Regulation (2A) contained in the Draft Regulations 5.1 Quantum understands that a number of advisers with respect to, and issues of subsection 67(4A) of the SIS Act arrangements consider that the arrangements are not financial products on the basis that they are credit facilities. 5.2 Section 765A of the Corporations Act specifically excludes certain arrangements from the definition of financial products. Specifically, paragraph 765A(1)(h)(i) of the Corporations Act provides that... the following are not financial products for the purposes of this Chapter... a credit facility within the meaning of the regulations Regulation of the Corporations Regulations provides for specific things that are not financial products pursuant to paragraph 765A(1)(h)(i) of the Corporations Act. The proposed Regulation (2A) intends to make it clear that subsection 67(4A) of the SIS Act arrangements are not credit facilities, and therefore do not fall within the exemption from the definition of financial product. 5.4 Quantum supports the proposed insertion of Regulation (2A) into the Corporations Regulations.

8 6. The proposed Regulation7.6.01AB contained in the Draft Regulations 6.1 Part 7.6 of the Corporations Act provides that a person who carries on a financial services business within the jurisdiction must have an Australian financial services licence. 6.2 Subsection 911A(1) of the Corporations Act provides that subject to certain exemptions... a person who carries on a financial services business in this jurisdiction must hold an Australian financial services licence covering the provision of the financial services. The term financial services business is defined in section 761A of the Corporations Act as... a business of providing financial services.... The term financial services is defined in section 766A of the Corporations Act as including: providing financial product advice (section 766B of the Corporations Act); dealing in a financial product or making a market in for a financial product (sections 766C 766D of the Corporations Act); operating a registered scheme (section 766D of the Corporations Act); providing a custodial or depository service (section 766E of the Corporations Act); and engaging in conduct of a kind prescribed by regulations. 6.3 Subsection 766B(1) of the Corporations Act defines the term financial product advice as a recommendation or statement of opinion, or a report of either of those things, that is intended to influence a person or persons in making a decision in relation to a particular financial product or class of financial products or an interest in a particular financial product or class of financial products, or could reasonably be regarded as having been intended to have such influence. 6.4 As outlined above, Quantum agrees with the amendment of the Corporations Regulations to ensure that subsection 67(4A) of the SIS Act arrangements are financial products. However, Quantum considers that such arrangements should be regarded as derivatives. 6.5 Subsection 926B(1) of the Corporations Regulations provides that: The regulations may: (a) exempt a person or class of persons from all or specified provisions of this Part; or (b) exempt a financial product or a class of financial products from all or specified provisions of this Part; or (c) provide that this Part applies as if specified provisions were omitted, modified or varied as specified in the regulations.

9 6.6 Regulation AA(1) of the Corporations Regulations in turn provides that for the purposes of paragraph 926B(1)(c) of the Corporations Act, a subsection 911A(7) is inserted after subsection 911A(6) of the Corporations Act which provides that The regulations may provide that a financial services licence is taken to cover the provision of financial services specified in the regulations. 6.7 The paragraph [4] of the Draft Regulations in turn provide that: For subsection 911A(7) of the Act, a person s financial services licence is taken to cover the provision of a financial service in relation to an arrangement relating to the acquisition of an asset under subsection 67(4A) of the Superannuation Industry (Supervision) Act 1993 if the licence would cover the service if it were provided in relation to a derivative. 6.8 Quantum agrees that those involved with providing financial product advice with respect to subsection 67(4A) of the SIS Act arrangements should only do so if their Australian financial services licence conditions authorise them to provide financial services with respect to derivatives (subsections 914A(7) and (8) of the Corporations Act), or if they are a representative of a principal who holds such authorisations (section 911B of the Corporations Act). 6.9 That is, Quantum agrees with the insertion of Regulation AB. 7. Requirement for a product disclosure statement 7.1 Broadly speaking, Division 2 of Part 7.9 of the Corporations Act provides that a product disclosure statement ( PDS ) be provided to a person before they acquire a financial product, where the person is acquiring the product as a retail client. The PDS must contain information about the financial product such as the identity of the issuer, any significant benefits or risks attaching to the product, and the costs of acquiring and holding the product. 7.2 Subject to the exceptions contained in section 1012D to 1012G of the Corporations Act, and section 1014E of the Corporations Act, a retail client must be provided with a PDS before three situations occur, being: Recommendation situation where, in the course of providing personal financial advice to the client, a regulated person 1 has recommended that the client acquire the financial product, and the acquisition is either by way of issue to the client, or by way of transfer to the client under a regulated secondary sale to which the PDS requirements apply (section 1012A of the Corporations Act); and Issue situation where a person offers to issue, or arrange the issue of, or issues a financial product to the client (section 1012B of the Corporations Act); and 1 As defined in section 1011B of the Corporations Act.

10 7.2.3 Sale situation where a person offers to sell, or sells a financial product to the client in circumstances amounting to an off-market sale by a controller of the issuer, a sale amounting to an indirect issue of the financial product, or a sale amounting to an indirect off-market sale by the controller of the issuer (section 1012C of the Corporations Act). 7.3 Note that the terms issue and sale have expanded meanings set out in section 1010C of the Corporations Act. 7.4 As noted above, the PDS requirement depends on the client being a retail client, which is defined in section 761G of the Corporations Act and Regulations to of the Corporations Regulations. Broadly speaking, if a financial product is not, or a financial service provided to a person does not relate to, a general insurance product, a superannuation product or an RSA product, the product or service is provided to the person as a retail client unless one or more of the following exceptions apply: the price for the provision of the financial product, or the value of the financial product to which the financial service relates, equals or exceeds $500,000 (noting that this category does not apply to certain life risk products); the financial product, or the financial service, is provided for use in a business that is not a small business (i.e. a business employing less than 100 people if the business is or includes the manufacture of goods, or less than 20 people if it is not); the financial product, or the financial service, is not provided for use in connection with a business, and the person who acquires the product or service gives the provider of the product or service, before the provision of the product or service, a copy of a certificate given within the preceding 6 months by a qualified accountant (as defined in the Corporations Act) that provides that the person: (a) (b) has net assets of $2.5 million; or has a gross income for each of the last two financial years of at least $250, the person is a professional investor. 7.6 It should be noted that the definition of professional investor is provided for in section 9 of the Corporations Act and includes (amongst other things): a body regulated by APRA, other than a trustee of a superannuation fund as described in paragraph below; and a trustee of a superannuation fund, an approved deposit fund, a pooled superannuation trust or a public sector superannuation scheme within the

11 meaning of the Superannuation Industry (Supervision) Act 1993 (Cth) and the fund, trust or scheme has net assets of at least $10 million. 7.7 It should be noted that most subsection 67(4A) of the SIS Act arrangements are entered into by trustees of regulated superannuation funds. Subsection 761G(6) of the Corporations Act provides that (subject to narrow exceptions), that... if a financial product provided to a person is a superannuation product or an RSA product, the product is provided to the person as a retail client That is, the proposed changes to the Corporations Act and Corporations Regulations will regulate the recommendation, issue and sale of subsection 67(4A) of the SIS Act arrangements to trustees of superannuation funds (i.e. the entity that will be acquiring an interest in a subsection 67(4A) of the SIS Act arrangement). 7.9 That is, the proposed changes will not affect the disclosure and licensing requirements with respect to a recommendation, issue or sale of a superannuation interest Quantum considers that the Corporations Act and / or Corporations Regulations should make it clear that those involved with the recommendation, issue or sale of arrangements which comply with subsection 67(4A) of the SIS Act to trustees of superannuation funds should be required to comply with the PDS (and general disclosure) requirements. * * * *