Treasury Laws Amendment (Financial Market Infrastructure and Other Measures) Bill 2024 - Initial Scrutiny [2024] AUSStaCSBSD 115 (26 June 2024)

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Purpose	The bill seeks to amend the Corporations Act 2001 and other Acts to implement recommendations by the Council of Financial Regulators in relation to Australia’s financial market infrastructure by: introducing a crisis management and resolution regime for domestic clearing and settlement (CS) facilities; expanding the licensing, supervisory and enforcement powers of the Australian Securities and Investments Commission (ASIC) and the Reserve Bank of Australia (RBA); and transferring certain powers relating to the licensing and supervision of CS facilities and financial markets to ASIC and the RBA.
Portfolio	Treasury
Introduced	House of Representatives on 27 March 2024
Bill status	Before the Senate

Standing appropriation
Instruments not subject to parliamentary oversight^[112]

1.154 Item 14 of Schedule 1 to the bill seeks to amend the Corporations Act 2001 (Corporations Act) by inserting proposed section 846B, which appropriates the Consolidated Revenue Fund for the purposes of making a payment under an arrangement authorised under proposed section 846A, which is for the purposes of crisis resolution.^[113] The authorisation will be provided by legislative instrument^[114] and the total maximum amount specified in an authorisation must not exceed $5,000,000,000.

1.155 Standing appropriations enable entities to spend money from the Consolidated Revenue Fund on an ongoing basis, usually for an indefinite duration. Unlike annual appropriations which require the executive to periodically request the Parliament to appropriate money for a particular purpose, once a standing appropriation is enacted any expenditure under it does not require regular parliamentary approval and therefore escapes direct parliamentary control. The amount of expenditure authorised by a standing appropriation may grow significantly over time, but without any mechanism for review included in the bill alongside the appropriation, for example a sunset clause, it is difficult for the Parliament to assess whether a standing appropriation remains appropriate.

1.156 Given the difficulty of ongoing parliamentary oversight over enacted standing appropriations, the committee expects a robust justification for why a standing appropriation should be established or expanded in the first place. To this end, the committee expects the explanatory memorandum to a bill which establishes or expands a standing appropriation to explain why it is appropriate to include a standing appropriation (rather than providing for the relevant appropriations in the annual appropriation bills) and whether the bill places a limitation on the amount of funds that may be appropriated or duration in which the standing appropriation will exist for. The committee also expects the explanatory memorandum to address whether the standing appropriation is subject to a sunset clause and, if not, why such a clause has not been included in the bill.

Funds designated for use in a CS facility resolution can only be used for the purposes of protecting the stability of the financial system in Australia or ensuring the service continuity of an Australian CS facility, critical to the functioning of Australia’s financial system. Public funds for CS facility resolution are intended to be limited to situations where a CS facility’s resources and recovery tools are insufficient to address losses, or the RBA considers the use of some recovery tools poses a threat to financial stability or otherwise compromises resolution objectives. It is expected that funds will be recovered after the crisis is resolved. Recovery mechanisms may be outlined in funding agreements. The provision of public funds is intended to be a last resort option, as preliminary tools available to regulators (such as the powers explained in Chapter 2) are expected to assist in crisis prevention.^[115]

1.158 The committee notes that the explanatory memorandum has provided some explanation as to what the standing appropriation is for and safeguards as to how the funds may be used. However, no explanation has been provided as to why such an appropriation should not be included in the annual appropriation bills.

1.159 In this instance, the committee’s concerns are heightened as the instrument is not subject to disallowance,^[116] cannot be revoked by the minister,^[117] and can commence prior to its registration on the Federal Register of Legislation,^[118] which limit the extent of parliamentary oversight. The committee notes the justification provided in the explanatory memorandum that this is necessary to ensure funding arrangements are made with maximum certainty in order to facilitate effective resolution.^[119] However, the committee remains concerned that there currently do not appear to be any mechanisms to provide parliamentary oversight, such as providing that proposed sections 846A and 846B are subject to a sunset clause to ensure parliamentary review of the expenditure of public funds.

1.160 In light of the above, the committee requests the Treasurer’s detailed advice as to:

Reversal of the evidential burden of proof^[120]

1.161 Item 14 and Item 28 of Schedule 1 to the bill seek to insert new offences and offence-specific defences into the Corporations Act.

1.162 Proposed subsection 837E(6) introduces a defence that a body corporate does not commit an offence against the Corporations Act if the body merely complies with a condition imposed under proposed subsection 837E(1).

1.163 Proposed subsection 834A(2) creates an offence where a person who is a director of a body corporate that is under statutory management purports to perform or exercise a function or a power of a director. Proposed subsection 834A(3) provides an exception to 834A(2) whereby a director of a body corporate is acting with the written approval of the statutory manager of the body corporate or the Reserve Bank.

1.164 Proposed subsection 848C(3) introduces a defence to the offence of disclosing information^[121]covered by a determination subject to secrecy provisions, where the disclosure is done in accordance with proposed sections 848D, 848E, 848F 848G, 848H, 848J or 848K.^[122]

1.165 Finally, proposed subsection 821H(1) creates a requirement for a body corporate that is a CS facility licensee or is a body corporate related to one to give written notice to the Reserve Bank immediately after forming an intention to enter into a transaction to recapitalise or if the board of the body corporate agrees to a plan to restructure the body corporate. The failure to do so is an offence under subsection 1311(1) of the Corporations Act. Proposed subsection 821H(2) provides the requirement to provide written notice is not applicable if the transaction or restructure is minor.

1.166 A note to each of these exceptions confirms that the evidential burden of proof is reversed in relation to those matters.

1.167 At common law, it is ordinarily the duty of the prosecution to prove all elements of an offence. This is an important aspect of the right to be presumed innocent until proven guilty. Provisions that reverse the burden of proof and require a defendant to disprove, or raise evidence to disprove, one or more elements of an offence, interferes with this common law right.

1.168 The committee expects any such reversal of the evidential burden of proof to be justified and for the explanatory memorandum to address whether the approach taken is consistent with the Attorney-General’s Department’s Guide to Framing Commonwealth Offences, Infringement Notices and Enforcement Powers (Guide to Framing Commonwealth Offences), which states that a matter should only be included in an offence-specific defence (as opposed to being specified as an element of the offence) where:

Placing an evidential burden in relation to those defences is appropriate, proportionate and reasonable. Principally, this is because in the vast majority of cases it will be peculiarly within the knowledge of the defendant how the information may have been publicly accessed, or the means by which the conduct was authorised by another law of the Commonwealth. This in turn is due to the wide range of publicly available information and circumstances in which other laws could authorise or require disclosure. Evidence establishing that disclosure was to a legal representative for the purpose of seeking legal advice or to another person as permitted by the other exceptions is also peculiarly within the defendant’s knowledge and control.^[124]

1.170 It is unclear to the committee how, in relation to each of these exceptions or defences, the requisite information is peculiarly within the defendant’s knowledge. The committee notes that for example, the defence under proposed subsection 848C(3) is applicable where disclosure has been made in accordance with the Reserve Bank Act 1959^[125] or the Australian Securities and Investment Commission Act 2001.^[126] It is not clear to the committee how any provision of any law can be peculiarly within any person’s knowledge, and that disclosure being authorised by a certain law is significantly more difficult or costly for prosecution to disprove.

1.171 Similarly, where disclosure has been authorised by the Reserve Bank^[127] or is under circumstances determined by the minister,^[128] it is the committee’s understanding that there is a written document authorising the disclosure in those circumstances that could be obtained by the prosecution and it is not clear how this information can be peculiarly within the defendant’s knowledge. The committee also notes this in relation to a determination made under proposed subsection 837E(1) and the defence under proposed subsection 837E(6).

1.172 Finally, in relation to proposed subsection 821H(1), the committee’s concerns are heightened as the defence does not clearly define the meaning of the terms ‘minor’ or ‘insignificant’ in the context of a transaction or restructure. The explanatory memorandum does not provide any further information on how these terms should be understood. The committee is concerned that this may cause uncertainty as to when a notification to the Reserve Bank is not required.

1.173 The committee draws its scrutiny concerns to the attention of senators and leaves to the Senate as a whole to consider the appropriateness of reversing the evidential burden of proof in relation to the defences and exceptions in the provisions detailed above.

Henry VIII clause^[129]

1.174 Items 53 and 56 of Schedule 2 to the bill amend existing sections 791C and 820C of the Corporations Act to broaden ASIC’s existing power to grant exemptions from all or specified provisions of Parts 7.2 and 7.3 of the Corporations Act. The amendment would allow ASIC to grant exemptions from Parts 7.2 and 7.3 to specified persons, CS facilities or financial markets, or to a class thereof. Where an exemption is granted to a specified person, CS facility or financial market, the exemption is not a legislative instrument.^[130] Where the exemption is granted to a class of persons, CS facilities or financial markets, the exemption is a legislative instrument that is subject to disallowance.^[131]

1.175 Provisions enabling delegated legislation to modify the operation of primary legislation are akin to Henry VIII clauses, which authorise delegated legislation to make substantive amendments to primary legislation (generally the relevant parent statute). The committee has significant scrutiny concerns with Henry VIII-type clauses, as such clauses impact on the level of parliamentary scrutiny and may subvert the appropriate relationship between the Parliament and the Executive. Consequently, the committee expects a sound justification to be included in the explanatory memorandum for the use of any clauses that allow delegated legislation to modify the operation of primary legislation.

1.176 In relation to exemptions from the operation of primary legislation, the committee is also of the view that from a parliamentary scrutiny perspective, these exemptions should be subject to a time limit and should be periodically reviewed to ensure the exemptions from the operation of primary legislation continue to be appropriate. The committee is concerned in this instance as it is possible for ASIC to issue exemptions that may apply indefinitely.^[132]

1.177 In this instance, the explanatory memorandum merely explains the extent of the broadening of the exemptions power and does not provide a justification for the need to exempt classes of persons, CS facilities and financial markets from Parts 7.2 and 7.3 of the Corporations Act. The explanatory memorandum also does not provide a justification as to why exemptions may be granted on an ongoing basis.

1.178 The committee requests the Treasurer’s advice as to why it is necessary and appropriate for proposed sections 791C and 820C of the bill to empower delegated legislation to create exemptions from Parts 7.2 and 7.3 of the Corporations Act 2001.

1.179 The committee also requests the Treasurer’s advice as to why it is necessary and appropriate for ASIC to be able to grant exemptions from the application of Parts 7.2 and 7.3 of the Corporations Act 2001 on an ongoing basis.

Limitation of judicial review^[133]

1.180 Item 65 of Schedule 2 to the bill introduces proposed section 826M, which imposes a requirement on ASIC to consult with various affected parties prior to making the Clearing and Settlement Facility Rules (CS facility rules). Proposed paragraph 826M(1)(a) clarifies that requirement extends to consultation with the public. However, under proposed subsection 826M(3), a failure to consult as required by proposed subsection 826M(1) does not invalidate a CS facility rule. A legislative provision that indicates that an act done or decision made in breach of a particular statutory requirement or other administrative law norm does not result in the invalidity of that act or decision, may be described as a 'no-invalidity' clause.

1.181 In this instance, where there has been a failure to meet the procedural requirement of consultation with the public or other listed parties, the appropriate avenue for recourse would be through judicial review as a result of jurisdictional error. In relation this, to the explanatory memorandum provides:

However, if ASIC fails to consult with the public, the RBA or any other person or body it does not invalidate the rule. This is because the CS facilities rules relate to regulating the entities that support the Australian financial system and affected entities require certainty to ensure that stability continues. Where a failure to meet procedural requirements would amount to jurisdictional error, the no invalidity provision do not prevent an entity from seeking judicial review under section 75(v) of the Constitution and section 39B of the Judiciary Act 1903.^[134]

1.182 Even if a party is able to seek judicial review, due to the operation of the no-invalidity clause in proposed subsection 826M(3), it is unclear what the practical efficacy of judicial review to provide a remedy for a legal error would be. For example, the conclusion that a decision is not invalid means that the decision-maker had the power (i.e. jurisdiction) to make it, which may mean that review of the decision on the grounds of jurisdictional error is unlikely to be available. The result is that some of judicial review's standard remedies will not be available.

1.183 The committee is concerned that although judicial review is available where there has been a failure to meet procedural requirements resulting in jurisdictional error, it is not apparent that seeking judicial review will result in an effective remedy for an affected party.

1.184 In light of the above, the committee requests the Treasurer’s advice as to:

Significant penalties
Significant matters in delegated legislation^[135]

1.185 A number of provisions in Schedules 1, 2 and 4 of the bill impose significant penalties for a number of offences, including maximum penalties of periods of imprisonment up to 5 years. Item 65 of Schedule 2 to the bill also seeks to introduce proposed section 826L to the Corporations Act which allows for the regulations to provide for alternatives to civil proceedings for a contravention of the Clearing and Settlement Facility Rules (CS Facility Rules), including civil penalties that are payable to the Commonwealth that may be up to 3000 penalty units for an individual and 15,000 penalty units for a body corporate.

1.186 The committee considers that, where significant penalties are imposed, the rationale should be fully outlined in the explanatory memorandum, and should be justified by reference to similar offences in Commonwealth legislation or if not, why not. This promotes consistency and guards against the risk that a person's liberty is unduly limited through the application of disproportionate penalties.

1.187 In this instance, the explanatory memorandum provides the following justification for the offence under proposed subsection 841A(3), in Schedule 1 to the bill, which relates to a refusal or failure to give specified information or documents to the Reserve Bank when directed to do so:

These penalties reflect the severity of the contravention which would likely have detrimental effects on the stability of the Australian financial system. It is imperative that directions issued during resolution are complied with in order to resolve distressed CS facilities. In addition, the penalty for contravention of a direction issued by the RBA is consistent with contravention of ASIC directions in non-crisis times.^[136]

1.188 Comparatively, the offence provisions under Schedules 2 and 4 of the bill have not been accompanied by similarly robust justifications, even where the offence provisions include custodial penalties. For example, in relation to a similar offence under proposed subsection 823G(3) in Schedule 2 to the bill, which relates to the failure to comply with a direction given by the Reserve Bank and carries a maximum penalty of 2 years imprisonment, the explanatory memorandum merely restates the provision.^[137]

1.189 Further, there are offences which carry higher penalties, such as the breach of a banning order under proposed subsection 853P(2) in Schedule 2 to the bill, carrying a maximum penalty of 5 years imprisonment. Although the context of addressing financial stability risks is noted, the committee still considers that where significant penalties are imposed, particularly where custodial penalties are imposed, the explanatory memorandum should include justifications for all of these penalties with reference to the Attorney-General’s Department’s Guide to Framing Commonwealth Offences^[138] and with reference to comparable offences.

1.190 In relation to proposed subsection 826L(2), which allows for regulations to set significant civil penalties, the explanatory memorandum provides:

The alternative to civil proceedings for noncompliance with CS facility rules by including regulation making power that enables a penalty to be set that may be a maximum of 3,000 for an individual or 15,000 penalty units for a body corporate. The explicit mention of the maximum penalty the regulations can prescribe is consistent with the Guide to Framing Commonwealth Offences.

The Guide to Framing Commonwealth Offences recommends maintaining consistency in the legislative framework with regards to penalties as much as is appropriate. Consistent with this principle, this compliance provision largely mirrors existing section 798K of the Act which applies to the enforcement of market integrity rules, section 901F of the Act which applies to enforcement of derivative transaction rules and section 903E of the Act which applies to enforcement of derivative trade repository rules. The significance of noncompliance with any of these rules and CS facility rules has the potential to adversely impact the financial system stability in Australia, which justifies the requirement for alternative compliance mechanisms in the Regulations.

The Attorney-General was consulted in relation to the inclusion of custodial penalties. Including the penalties in regulations are considered by the Federal Executive Council and are subject to disallowance by Parliament. This provides an additional layer of scrutiny and accountability. Therefore, the delegated offence in the Regulations is necessary and proportionate to the objective of ensuring compliance with the CS facility rules.^[139]

1.191 While the committee welcomes the justification provided for the penalties themselves with reference to similar compliance provisions, and the consultation with the Attorney-General, the explanatory memorandum does not justify why these measures are appropriate for inclusion in delegated legislation, rather than be included on the face of the bill. Although the relevant regulations may be subject to disallowance, the committee does not consider that this is sufficient justification for the inclusion of penalties in delegated legislation, as delegated legislation is not subject to the same level of parliamentary scrutiny as primary legislation. In this instance, the committee’s concerns are heightened as the regulations may provide for up to 3000 penalty units for an individual.

1.192 The committee requests the Treasurer’s advice as to whether justifications can be provided for the appropriateness of the criminal penalties in Schedules 2 and 4 of the bill, whether these offences are broadly equivalent to similar offences in Commonwealth legislation, and if not, why not. The committee's consideration of the appropriateness of these provisions would be assisted if the Treasurer’s response explicitly addresses relevant principles as set out in the Attorney-General’s Department’s Guide to Framing Commonwealth Offences, Infringement Notices and Enforcement Powers.

1.193 The committee also requests the Treasurer’s detailed justification as to why it is necessary and appropriate for proposed subsection 826L(2) to allow for the regulations to set civil penalties of up to 3,000 penalty units for an individual and 15,000 penalty units for a body corporate, rather than including these penalties on the face of the bill.

^[111] This entry can be cited as: Senate Standing Committee for the Scrutiny of Bills, Treasury Laws Amendment (Financial Market Infrastructure and Other Measures) Bill 2024, Scrutiny Digest 7 of 2024; [2024] AUSStaCSBSD 115.

^[112] Schedule 1, item 14, proposed section 846B. The committee draws senators’ attention to this provision pursuant to Senate standing order 24(1)(a)(v).

^[120] Schedule 1, items 14 and 28, proposed subsections 837E(6), 834A(3), 848C(3) and 821H(2). The committee draws senators’ attention to these provisions pursuant to Senate standing order 24(1)(a)(i).

^[129] Schedule 2, items 53 and 57, proposed sections 791C and 820C. The committee draws senators’ attention to these provisions pursuant to Senate standing order 24(1)(a)(iv).

^[133] Schedule 2, item 65, proposed subsection 826M(3). The committee draws senators’ attention to this provision pursuant to Senate standing order 24(1)(a)(iii).

^[135] Schedules 1, 2 and 4. The committee draws senators’ attention to these Schedules pursuant to Senate standing order 24(1)(a)(i) and (iv).

Australian Senate Standing Committee for the Scrutiny of Bills - Scrutiny Digests