Home | Databases | WorldLII | Search | Feedback Australian Senate Standing Committee for the Scrutiny of Bills - Scrutiny Digests

You are here: 

Treasury Laws Amendment (2017 Measures No 5) Bill 2017 - Commentary on Ministerial Responses [2017] AUSStaCSBSD 361 (18 October 2017)

Treasury Laws Amendment (2017 Measures No. 5)
Bill 2017

2.225 The committee dealt with this bill in Scrutiny Digest No. 11 of 2017. The Minister responded to the committee's comments in a letter dated 3 October 2017. Set out below are extracts from the committee's initial scrutiny of the bill and the Treasurer's response followed by the committee's comments on the response. A copy of the letter is available on the committee's website.^[119]

Significant matters in delegated legislation^[120]

Initial scrutiny – extract

2.226 This bill proposes to establish a new licensing regime for administrators of designated significant financial benchmarks. The bill provides a framework for the new regulatory regime with much of the detail to be provided for in rules (delegated legislation). Proposed Division 3 of Part 7.5B provides that the Australian Securities and Investment Commission (ASIC) will be empowered to make the financial benchmark rules and the compelled financial benchmark rules. The type of matters that could be included in such rules include significant matters, such as:

• the responsibilities of benchmark administrator licensees;

• the manner in which benchmark administrator licensees are to provide their services, including the manner and conditions (including fees) on which they provide access to financial benchmarks;

• how conflicts of interest and complaints of benchmark administrator licensees are to be handled;

• the persons who are obliged to comply with requirements imposed by the rules and the manner and form in which those persons must comply; and

• the power for ASIC to require, by written notice, an entity to provide certain data or information or to require a benchmark administrator to generate or administer a significant financial benchmark.^[121]

2.227 Most significantly, proposed section 908CF provides that a person must comply with any provisions set out in the rules that apply to the person. If a person does not comply with such provisions they will be liable to a civil penalty, and proposed section 908CO provides that the rules may specify a penalty amount for a rule of up to 5,500 penalty units ($1.155 million).

2.228 The committee's view is that significant matters, such as key details about how the financial benchmark administrator licensee scheme is to operate and the imposition of civil penalties, should be included in primary legislation unless a sound justification for the use of delegated legislation is provided. In this instance, the explanatory memorandum provides no justification as to why such matters are proposed to be included in delegated legislation.

2.229 The committee also notes that these significant matters are to be included in 'rules' rather than in 'regulations'. The issue of the appropriateness of providing for significant matters in legislative rules (as distinct from regulations) is discussed in the committee's First Report of 2015.^[122] In relation to this matter, the committee has noted that regulations are subject to a higher level of executive scrutiny than other instruments as regulations must be approved by the Federal Executive Council and must also be drafted by the Office of Parliamentary Counsel (OPC). Therefore, if significant matters are to be provided for in delegated legislation (rather than primary legislation) the committee considers they should at least be provided for in regulations, rather than other forms of delegated legislation which are subject to a lower level of executive scrutiny.^[123] The committee further notes that OPC's Drafting Direction 3.8 states that material covering civil penalties should be included in regulations unless there is a strong justification for prescribing it in another type of legislative instrument.^[124]

2.230 In addition, the committee notes that proposed paragraph 908CB(j) provides that the regulations may prescribe matters that may be dealt with by the rules. The committee notes it is unusual for primary legislation to provide for the making of a regulation which, in turn, provides a power to set out what matters are to be set out in rules.

2.231 The committee's view is that significant matters, such as key details about how the financial benchmark administrator licensee scheme is to operate and, in particular, the imposition of civil penalties, should be included in primary legislation unless a sound justification for the use of delegated legislation is provided. In this regard, the committee requests the Minister's detailed advice as to:

• why it is considered necessary and appropriate to leave most of the elements of this new scheme to delegated legislation; and

• if significant matters are to be included in delegated legislation, why it is appropriate to include these in rules rather than regulations, particularly in relation to the imposition of civil penalties.

Treasurer's response

2.232 The Treasurer advised:

The Bill allows for the Australian Securities and Investments Commission (ASIC) to make financial benchmark rules and compelled financial benchmark rules and provides the parameters for matters these may address.

• The financial benchmark rules may address matters such as the responsibilities of benchmark administrator licensees and the generation and administration of financial benchmarks. Financial benchmarks and their generation and administration can be complex. As each financial benchmark is different, the flexibility of being able to quickly tailor the requirements to each financial benchmark subject to the regime is important to benchmark administrators. The appropriate operation of financial benchmarks is important to domestic and offshore users of these benchmarks and supports confidence in the Australian market.

• The compelled financial benchmark rules may be made to require an entity to provide data or information on a licensed significant financial benchmark, or to require a benchmark administrator licensee to continue to operate a significant financial benchmark specified in its licence. To effectively respond to rapid shifts or developments in the marketplace that may otherwise compromise the ongoing generation and provision of the significant financial benchmark, such rules are likely to be required at short notice, such as a few days or less. Primary legislation and regulations would not generally facilitate such a timely response. It is important to note that these rules only apply to significant financial benchmarks. That is, a benchmark that is systematically important in Australia, or a benchmark where there would be a material impact on Australian retail or wholesale investors if there was a disruption to the operation or integrity of the benchmark.

For non-compliance with the rules, a civil penalty may apply. The high maximum amount of the penalty recognises the potentially significant impact that serious misconduct in relation to financial benchmarks may have, given their widespread use in the financial system. However, as noted in the explanatory memorandum to the Bill, while the Bill imposes a high maximum amount, the primary objective of this penalty is to act as a deterrent to breaches. In practice, if a monetary penalty was to be sought, it would be proportionate to the seriousness of the breach.
In addition to responding flexibly to changing market dynamics, the obligations to be imposed on financial benchmark licensees also need to be flexible in response to international developments, including at short notice. It is important for Australia that licensed benchmark administrators and benchmark end users that Australia's regulatory regime be recognised as equivalent to key regimes overseas and that this status is maintained. Without equivalence recognition, Australian benchmarks would not be able to be used by global market participants which would cause significant market disruption. For example, Australia's largest banks may not be able to raise certain types of funding overseas as they do currently, which could negatively affect credit provision to the Australian economy. The use of rules is the most effective and timely mechanism for ensuring equivalence recognition is maintained over time.
The rules approach was also broadly supported by stakeholders in their submissions to the Council of Financial Regulator's consultation on the proposed regime, noting that this would better ensure that obligations are targeted to addressing specific risks arising from benchmark administration and continue to be aligned to global best practice, ensuring equivalence. Flexibility is also necessary so that the nature of the obligations can be tailored to apply appropriately to different benchmarks, as well as adapt to changes and emerging risks in those benchmarks. With the compelled financial benchmark rules it is particularly important that the regime could be amended in response to rapid market developments or industry feedback.
The use of ASIC rules to prescribe much of the detail of the regime and the imposition of a civil penalty via the primary legislation for a failure to comply with the rules are both consistent with the approach taken in comparable contexts, including in relation to derivative trade reporting and market integrity rules. Checks and balances are provided in the Bill in relation to the making of the rules, including importantly the need for the Minister to consent to the making or varying of ASIC rules.

Committee comment

2.233 The committee thanks the Treasurer for this response. The committee notes the Treasurer's advice that as each financial benchmark is different it is important to have flexibility to quickly tailor the requirements to each financial benchmark subject to the regime. The committee also notes the Treasurer's advice that primary legislation and regulations would not generally facilitate a timely response to rapid shifts or developments in the marketplace. The Treasurer also advised that obligations on financial benchmark licensees need to be flexible in response to international developments, including at short notice, and that it is important that Australia's regulatory regime be recognised as equivalent to key regimes overseas, and so the use of rules is the most effective and timely mechanism for ensuring equivalence recognition is maintained over time.

2.234 The committee requests that the key information provided by the Treasurer be included in the explanatory memorandum, noting the importance of this document as a point of access to understanding the law and, if needed, as extrinsic material to assist with interpretation (see section 15AB of the Acts Interpretation Act 1901).

2.235 In light of the detailed information provided, the committee makes no further comment on this matter.

Procedural fairness^[125]

Initial scrutiny – extract

2.236 Proposed section 908BI provides that ASIC may, by giving written notice to a benchmark administrator licensee, suspend or cancel the licensee's licence in certain listed circumstances. Unlike the process for suspension or cancellation under proposed section 908BJ, there is no requirement that ASIC give the licensee an opportunity to show cause why the licence should not be suspended or cancelled. The committee notes that procedural fairness generally requires that a person should be given an opportunity to present their case, before a decision is made by a statutory or administrative body that could affect their rights or interests. The explanatory memorandum does not explain why proposed section 908BI does not require ASIC to give affected licensees the right to be heard before their licence is cancelled.

2.237 The committee therefore requests the Treasurer's advice as to why proposed section 908BI does not require ASIC to give affected licensees the right to be heard before their licence is suspended or cancelled, and whether it is intended that ASIC will ensure that a hearing will be given where fairness requires one.

Treasurer's response

2.238 The Treasurer advised:

Section 908BI sets out the circumstances when ASIC may suspend or cancel a benchmark administrator licence immediately. These circumstances are narrow and are objective circumstances that would be within the knowledge of the licensee because the licensee has:

• asked ASIC for the suspension or cancellation;

• ceased carrying on a benchmark administration business for the relevant financial benchmark;

• become a Chapter 5 body corporate (meaning broadly that it is being wound up or is under administration); or

• failed to pay a levy amount that is overdue.^[126]

Beyond the narrow grounds set out in section 908BI, the other grounds that may give rise to a suspension or cancellation are dealt with under section 908BJ, which does require ASIC to give the licensee an opportunity to respond because the grounds under section 908BJ are less objective and more contestable. Under section 908BJ the grounds for suspension or cancellation are where ASIC considers that the licensee has breached a condition of its licence, or one of its obligations under Part 7.5B of the Corporations Act 2001 or the associated financial benchmark rules. As the grounds are more contestable, it is appropriate in these circumstances for ASIC to be obliged to afford the licensee the opportunity to respond to the proposed grounds for suspension or cancellation at a hearing before ASIC makes a decision.

Committee comment

2.239 The committee thanks the Treasurer for this response. The committee notes the Treasurer's advice that the circumstances when ASIC may suspend or cancel a licence immediately are narrow and objective and would be within the knowledge of the licensee. The committee also notes the Treasurer's advice that beyond the narrow grounds in proposed  section 908BI , the bill provides that where there are more contestable grounds for suspending or cancelling a licence ASIC is obliged to afford the licensees an opportunity to respond.

2.240 The committee requests that the key information provided by the Treasurer be included in the explanatory memorandum, noting the importance of this document as a point of access to understanding the law and, if needed, as extrinsic material to assist with interpretation (see section 15AB of the Acts Interpretation Act 1901).

2.241 In light of the information provided, the committee makes no further comment on this matter.

Immunity from civil or criminal liability^[127]

Initial scrutiny – extract

2.242 Proposed section 908CJ provides that no civil or criminal liability will arise from any action taken by a person providing information, allowing access to information or generating or administering a significant financial benchmark if the person does so in good faith in compliance with a requirement imposed by the compelled financial benchmark rules. This therefore removes any common law right to bring an action to enforce legal rights, unless it can be demonstrated that lack of good faith is shown. The committee notes that the courts have taken the position that bad faith can only be shown in very limited circumstances.

2.243 The committee expects that if a bill seeks to provide immunity from civil or criminal liability, particularly where such immunity could affect individual rights, this should be soundly justified. In this instance, the explanatory memorandum provides no explanation for this provision, merely restating the terms of the provision.^[128]

2.244 The committee requests the Treasurer's advice as to why it is considered appropriate to provide a protected person with civil and criminal immunity so that any affected persons have their right to bring an action to enforce their legal rights limited to situations where lack of good faith is shown.

Treasurer's response

2.245 The Treasurer advised:

The immunity created by section 908CJ applies only to acts done in compliance with a requirement imposed on the person under the compelled financial benchmark rules (see above response on significant matters in delegated legislation, for a brief explanation of these rules). This protection is appropriate because if it has become necessary to compel a person to do something under the compelled financial benchmark rules, they will be doing an act necessary to support the continued existence and availability of a significant financial benchmark. This is of benefit to the Australian economy and all users of the benchmark. If the rare and exceptional circumstances have arisen such that it is necessary to compel a person to do something under the compelled financial benchmark rules, it is likely that there is a degree of abnormal market conditions and uncertainty. In recognition of the potential difficulties faced by a compelled person in these circumstances, it is appropriate to provide civil and criminal immunity so long as the person is acting in good faith in carrying out the requirement imposed compulsorily on them in order to preserve the continued availability of the significant financial benchmark.
The impact on an affected person who is not able to bring an action against a person protected under section 908CJ is less than the widespread and significant impact that would be suffered by users of a significant financial benchmark if its availability was disrupted.

Committee comment

2.246 The committee thanks the Treasurer for this response. The committee notes the Treasurer's advice that the immunity created by proposed section 908CJ applies only to acts done by a person where the person has been compelled to do something under the rules, and in recognition of the potential difficulties faced by a compelled person in these circumstances, it is appropriate to provide civil and criminal liability so long as the person is acting in good faith.

2.247 The committee requests that the key information provided by the Treasurer be included in the explanatory memorandum, noting the importance of this document as a point of access to understanding the law and, if needed, as extrinsic material to assist with interpretation (see section 15AB of the Acts Interpretation Act 1901).

2.248 In light of the detailed information provided, the committee makes no further comment on this matter.

[119] See correspondence relating to Scrutiny Digest No. 12 of 2017 available at: www.aph.gov.au/senate_scrutiny_digest.

[120] Schedule 1, item 1, proposed Division 3 of Part 7.5B. The committee draws Senators' attention to this Division pursuant to principle 1(a)(iv) of the committee's terms of reference.

[121] See proposed sections 908CB, 908CC and 908CE.

[122] Senate Standing Committee for the Scrutiny of Bills, First Report of 2015, 11 February 2015, pp 21–35.

[123] See also Senate Standing Committee on Regulations and Ordinances, Delegated Legislation Monitor No. 17 of 2014, 3 December 2014, pp 6–24.

[124] Office of Parliamentary Counsel, Drafting Direction 3.8, Subordinate Instruments, July 2017, p. 3

[125] Schedule 1, item 1, proposed section 908BJ. The committee draws Senators' attention to this provision pursuant to principle 1(a)(iii) of the committee's terms of reference.

[126] As outlined in the Minister's second reading speech for the ASIC Supervisory Cost Recovery Levy Bill 2017, these provisions exist to ensure the integrity of ASIC's cost recovery regime. In line with the ASIC Supervisory Cost Recovery Levy (Collection) Act 2017, entities have the ability to apply for a waiver of their liability for a levy if there are exceptional circumstances justifying a waiver, or for extensions to the due date of payment.

[127] Schedule 1, item 1, proposed section 908CJ. The committee draws Senators' attention to this provision pursuant to principle 1(a)(i) of the committee's terms of reference.

[128] See explanatory memorandum, p. 31.