The Alternative Investment Management Association

Alternative Investment Management Association Representing the global hedge fund industry

Regulatory reform roundup - Australia

John Currie, Maria Polczynski and Sarah Williams

Henry Davis York Lawyers

Q4 2006



After what some saw as a slight ‘breather’ during 2005, the pace of regulatory reform in Australia has redoubled during 2006. Many of the reforms will have far-reaching implications for all areas of the financial services industry, and the reforms outlined in this article will impact directly on hedge funds and hedge fund participants who have relevant connections with Australia.

Scope of this article

We shall outline changes in the following areas:

• Anti-Money Laundering and Counter-Terrorism Financing (AML-CTP) legislation;
• Conflicts of Interest policy; and
• Financial Services Reform Act (FSRA) regime refinements.

Anti-Money Laundering and Counter-Terrorism Financing (AML - CTF) legislation

Australia has moved one step closer to implementing the Financial Action Task Force's (FATF's) revised recommendations of June 2003 with the release on 13 July 2006 of a second exposure draft of the Anti Money Laundering and Counter-Terrorism Financing Bill, together with draft AML/CTF Rules.

Australia is implementing the revised FATF 40 recommendations in two tranches. The first will cover financial services and the second will address FATF's "designated non-financial businesses and professions". The Bill therefore focuses on financial services, although with some passing references to casinos, as these two sectors are subject to the current financial transactions reporting laws.

The draft laws impose obligations on "reporting entities". A reporting entity is one that provides any "designated service".

Where the laws apply, the reporting entity has the following key obligations:

• to conduct initial identification of new customers
• to establish and maintain an AML/CTF compliance programme to "identify, mitigate and manage" the risks that a designated service facilitates money laundering or financing of terrorism
• to monitor transactions as part of ongoing due diligence and undertake re verification of identity, if there are circumstances giving rise to an obligation to report a suspect transaction
• to report suspicious transactions, threshold transactions (i.e. over AUD10,000), international and other funds transfer instructions, cross border movements of physical currency and bearer negotiable instruments
• to register as a designated remittance service provider if providing this service otherwise than as a prudentially regulated entity
• to conduct due diligence on correspondent banks and to cease business with any correspondent bank that is identified as a shell bank.
The legislation is stated to be risk-based and achieves this more effectively than its predecessor draft. The level of ML/TF risk against which identification and ongoing obligations are measured must be identified by a reporting entity having regard to its customer types, the types of designated services it provides, its delivery channels, and the foreign jurisdictions with which it deals or in which it operates.

The current Australian financial intelligence unit, AUSTRAC, will be the regulator under the new laws, which confer on AUSTRAC the rule making power to flesh out the statutory requirements for such things as identity verification; suspicious transaction monitoring and reporting, and compliance programs.

The Bill is expected to be enacted this year, with a phased implementation period. Present indications are that the government wants a 12 to 18 month implementation, while industry wants three years. Transitional provisions are yet to be released.

Conflicts of interest policy

As the national regulator having responsibility for the FSRA regime, the Australian Securities and Investments Commission (ASIC) has over the last few years developed detailed policy as to how it expects financial services providers to deal with conflicts of interest. In particular ASIC's Policy Statement 181, issued in August 2004, provided ASIC's approach to how providers should comply with their statutory obligations to manage conflicts of interest.

More practical detail was provided in an ASIC Discussion Paper on managing conflicts of interest released on 19 April 2006. In the Discussion Paper ASIC used hypothetical case studies to explain what is perceived as conflicts of interest and its views on how those conflicts should be managed. The Discussion Paper, number 06-121 is available at Significantly none of the hypothetical case studies was specifically directed to the hedge funds industry. This is in line with the overall scheme of the Australian legislation and ASIC policy, to the effect that hedge fund managers should be regulated in the same way as conventional fund managers and likewise hedge funds themselves be subject to the same treatment as other funds.

The conflicts of interest issue has recently re-emerged as one of particular interest and concern due to the decision by ASIC in March 2006 to launch civil penalty proceedings in the Federal Court of Australia against Citigroup Global Markets Australia Pty Ltd (Citigroup). Further details can be found at here and Citigroup has denied its wrongdoing.

The Citigroup case has prompted strong criticism of ASIC by industry groups, most prominently the Australian Financial Markets Association (AFMA).

In a submission to the Corporate and Financial Services Regulation Review, AFMA echoed Citigroup's claim that the regulator should have flagged the issues with the investment banking industry. AFMA has said:

"At a minimum we should aim to ensure that the industry as a whole is not taken by surprise by an ASIC policy view…. It is unacceptable that this policy matter is being decided by the courts, before ASIC signalled its policy concerns to the industry, and before there was any discussion with the industry on the implications of ASIC's intended approach."

The hearing of the case, which will probably not occur until calendar 2007, is obviously awaited with great interest.

FSR regime refinements

In our firm's articles in the April and December 2004 editions of the Journal we outlined the effect of the introduction of the FSR regime, its introduction into the Australian body of law as Chapter 7 of the Australian Corporations Act, and the growing range of exemptions available for offshore (i.e non-Australian-resident) financial services providers.

Essentially, the FSRA regime provides a comprehensive legislative regime for the regulation of nearly all financial products and financial services in Australia, and it has a wide extra-territorial net, so that the jurisdiction of the legislation and of the national regulator, ASIC, extends to investment promotion, dealing, advice and market making, and other forms of "financial services business" whether they are undertaken in Australia or offshore.

Over the last 15 months, the Australian Government through the Australian Treasury has undertaken a wide-ranging review of the practical implications of the legislation. As a result the so called FSRA Refinement Program was brought into effect in December 2005.

Briefly the FSRA Refinements bring about the following changes:

• Introduction of Consolidated Financial Services Guide (FSG). The FSG is the disclosure document required to be given to retail investors which discloses the financial services business of the provider and comprehensive cost fee and commission information. An FSG may now be tailored to a specific financial service or product. This refinement will be useful to Licensees with more than one channel of product or service distribution.
• Introduction of short-form Product Disclosure Statement (PDS). The PDS is the disclosure document required to be given to retail investors which describes the characteristics of the financial product offered, including risks involved in the product, benefits, costs and returns and other significant characteristics of the product. It will be possible to use a PDS which will contain only "core" product information. The regulations have not defined "core". However, presumably this would include the a description of the product or service and its risks, costs, features, benefits and dollar disclosure which make the bulk of standard PDSs. But there is a catch! Before producing a short-form PDS, Licensees will need to prepare a full PDS to be made available to retail investors when requested. This will mean subjecting both the full and short-form PDS to a due diligence process.
• A wider meaning is now given to "wholesale" or "non-retail" investors which will now include assets or income of trust companies controlled by the investor as well as the assets or income directly controlled by the investor. Additionally, the A$10 million controlled assets threshold for a "professional investor" has been expanded to include A$10 million in "gross assets".
• A broader meaning is given to "general advice" to allow general inquiries about financial products to be made without triggering disclosure or other licensing requirements.
• The jurisdictional reach of Chapter 7 has been limited (slightly). Chapter 7, which contains the FSRA regime, is currently given very extensive extra-territorial effect. Under the Refinements, in some circumstances Licensees will not need to provide disclosure documents where they provide financial services to clients outside Australia. Foreign financial service providers will also be exempt from disclosure requirements in certain circumstances.
• Other refinements have been made to such areas as facilitating consolidation of statements of personal advice, oral disclosure requirements and disclosure requirements for Basic Deposit Products.

Back to Listing

Main Menu

  1. Home
  2. About
    1. Our Core Objectives
    2. AIMA's Policy Principles
    3. Meet the team
    4. AIMA Council
    5. Global Network
    6. Sponsoring Partners
    7. Opportunities at AIMA
    8. AIMA’s 25th anniversary in 2015
  3. Join AIMA
    1. Benefits of Membership
    2. Membership Fees
    3. Application form
  4. Members
    1. AIMA DDQs
    2. AIMA Annual Reports
    3. AIMA Governance
    4. AIMA Logo
      1. Policy note
    5. AIMA Members' List
    6. AIMA Review of the Year
    7. Committees and Working Groups
    8. Weekly News
    9. Update Profile
  5. Investors
    1. AIMA Investor Services
    2. AIMA Members' List
    3. Investor Steering Committee
  6. Regulation
    1. Asset Management Regulation
      1. EU Asset Management Regulation
        1. AIFMD
        2. European Capital Markets Regulation
        3. MiFID / MiFIR
        4. UCITS
        5. European Venture Capital Directive
        6. Shareholder Rights Directive
        7. European Long Term Investment Fund Regulation
        8. Loan Origination Funds
        9. Capital Raising
        10. AIFMD-Related Events
      2. US Hedge Fund Adviser Regulations
        1. Registration and Reporting
        2. Incentive-Based Compensation
        3. JOBS Act
      3. Asia Pacific Asset Management regulation
      4. Other Jurisdictions’ Asset Management Regulation
      5. Private Placement Regime
        1. Canada
        2. Dubai
        3. Finland
        4. Germany
        5. Hong Kong
        6. Japan
        7. Saudi Arabia
        8. Sweden
        9. United Arab Emirates
      6. Systemically Important Financial Institutions ('SIFIs')
      7. Remuneration
        1. UK
        2. United States
        3. CRD IV and CRR
        4. AIFMD
        5. MiFID
      8. Shadow Banking
      9. Volcker Rule
      10. Other
      11. Systemic Risk Reporting
      12. Dealing Commission
      13. Corporate Governance
      14. Securitisation
    2. Markets Regulation
      1. Bank/Capital Regulation
        1. Capital Requirements Directive
        2. EU Bank Structural Reforms
      2. Capital Markets Union
      3. Derivatives/Clearing
        1. EMIR
        2. MiFID II / MiFIR - Derivatives
        3. MAD / MAR
        4. Dodd-Frank Act Title VII
        5. Hong Kong
        6. IOSCO
        7. Singapore
      4. High Frequency Trading
        1. EU automated trading
          1. ESMA Guidelines
          2. Germany
          3. MiFID II / MiFIR - HFT
        2. US automated trading
          1. SEC Regulation SCI
          2. CFTC Automated Trading
        3. IOSCO
        4. Flash Crash
      5. Insurance Regulation
        1. Solvency II
      6. Market Abuse
        1. MAD / MAR
        2. Indices as Benchmarks
      7. Position Limits
        1. MiFID II - Commodities
        2. CFTC Position Limits
      8. Resolution of Financial Institutions
        1. Europe
          1. EU Bank Recovery and Resolution Directive
          2. EU Non-Bank Recovery and Resolution
        2. CPSS-IOSCO
        3. Financial Stability Board
        4. UK
        5. USA
      9. Shadow Banking
        1. International Shadow Banking
        2. EU Shadow Banking - SFT reporting & transparency
      10. Short Selling
        1. EU Short Selling Regulation
        2. Hong Kong Short Selling Regulation
        3. US Short Selling Regulation
      11. Trading
        1. Dodd-Frank Act
        2. MiFID Portal
        3. REMIT
        4. Securities Settlement
    3. Tax Affairs
      1. Automatic Exchange of Information (AEOI)
        1. FATCA
        2. EU - AEFI
        3. OECD - Global Standard on AEFI
      2. Australia - Investment Manager Regime (IMR)
      3. Base Erosion - Profit Shifting (BEPS)
      4. FIN 48 and IAS 12
      5. Financial Transaction Tax (FTT)
      6. UK Investment Management Exemption (IME)
      7. UK Offshore Funds Regime
      8. Other
    4. AIMA's Policy Principles
    5. Search
    6. Resources
      1. Guidance Notes
      2. Jurisdictional Guides
      3. Noticeboard
        1. AEOI: FATCA and other regimes
        2. AIFMD
        3. Bank/Capital Regulation (including NSFR)
        4. BEPS
        5. CFTC Registration and Exemptions
        6. Corporate Governance
        7. Dealing Commission
        8. Derivatives
        9. FTT
        10. High Frequency Trading
        11. MiFID / MiFIR
        12. Other Hot Asset Management Topics
        13. Other Hot Markets Topics
        14. Other Hot Tax Topics
        15. Position Limits
        16. Trading
        17. UCITS
        18. UK Partnership Tax Review
        19. US State and Local Taxes
        20. Volcker Rule
      4. Hedge Fund Manager Training
      5. Quarterly Regulatory Update
      6. Webinar Programme
      7. Regulatory Compliance Association
        1. About the Regulatory Compliance Association
        2. RCA Curricula and initiatives for alternative investment firms
        3. Meet the regulators and Sr. Fellows
  7. Education
    1. Research
      1. AIMA Research
      2. Industry research
      3. Search research documents
    2. "The Case for Hedge Funds"
      1. Global Hedge Fund Industry Paper: The value of our industry
      2. The Value of the Hedge Fund Industry to Investors, Markets and the Broader Economy: Research commissioned by AIMA and KPMG
      3. The Evolution of an Industry: KPMG/AIMA Global Hedge Fund Survey
      4. Contributing to Communities: A global review of charitable and philanthropic activities by the hedge fund industry
      5. Beyond 60-40: The evolving role of hedge funds in institutional investor portfolios
      6. The Cost of Compliance: Global hedge fund survey by AIMA, MFA and KPMG
      7. Capital Markets and Economic Growth: Long-term trends and policy challenges
      8. Apples and Apples: How to better understand hedge fund performance
      9. The Extra Mile: Partnerships between hedge funds and investors
      10. Key articles by AIMA on the case for hedge funds
    3. AIMA Journal
      1. Recent issues
      2. Search AIMA Journal articles
      3. AIMA Journal Archive
    4. AIMA Guides to Sound Practices
    5. AIMA guides for institutional investors
    6. CAIA Association pages
      1. Fundamentals of Alternative Investments
    7. Regulatory Compliance Association pages
      1. About the Regulatory Compliance Association
      2. RCA Curricula and initiatives for alternative investment firms
      3. Meet the regulators and Sr. Fellows
    8. Certified Investment Fund Director programme
    9. Services to Start-up Managers
    10. Glossary
  8. Events
    1. AIMA Events
      1. AIMA Annual Conference
        1. AIMA 25th Anniversary AGM & Annual Conference
      2. AIMA's Global Policy and Regulatory Forum
        1. 2015 Forum - Review
        2. 2015 Forum - Photos
        3. 2015 Forum - Agenda
        4. 2015 Forum - Sponsors and Supporting Organisations
    2. AIMA webinars
    3. Industry events
  9. Media
    1. Press Releases & Statements
    2. AIMA's blog
    3. Media Coverage
      1. Articles by AIMA
        1. Archive
      2. AIMA in the news
      3. Video interviews
      4. Industry news
    4. Media Contact
    5. Press Materials

Sub Menu

  1. Education
    1. AIMA Journal
    2. Bibliography
    3. CAIA Designation
    4. Research
    5. Roadmap to Hedge Funds
    6. AIMA's Investor Steering Committee Paper
    7. Glossary
  2. Regulatory, Tax, Policy & Government Affairs
    1. AIMA Position Papers
    2. AIMA Responses
      1. Australian Tax Office
      2. Authority for the Financial Markets
      3. Committee of European Banking Supervisors
      4. Committee of European Securities Regulators
      5. Commodity Futures Trading Commission
      6. Dubai Financial Services Authority
      7. European Commission
      8. European Securities and Markets Authority
      9. Swiss Financial Market Supervisory Authority
      10. Financial Services Authority (UK)
      11. Financial Services and the Treasury Bureau
      12. Guernsey Financial Services Commission
      13. HM Revenue & Customs
      14. HM Treasury
      15. Independent Commission on Banking
      16. IOSCO
      17. Monetary Authority of Singapore
      18. Securities and Exchange Board of India
      19. Securities and Exchange Commission (USA)
      20. Securities and Futures Commission
      21. Singapore Exchange
      22. The Takeover Panel
      23. US House of Representatives / Senate
      24. Federal Deposit Insurance Corporation
      25. Financial Stability Oversight Council
      26. Financial Stability Board
      27. US Treasury
      28. Internal Revenue Service
      29. US Federal Reserve
      30. Financial Industry Regulatory Authority (FINRA)
      31. Council of European Union
      32. Hong Kong Exchanges and Clearing
      33. House of Lords
    3. AIMA Summaries
      1. CESR
      2. European Commission
      3. Financial Services Authority (UK)
      4. HM Revenue & Customs
      5. HM Treasury
      6. IOSCO
      7. Securities and Exchanges Commission
      8. FSOC
      9. CFTC
    4. Guidance Notes
    5. Jurisdictional Resource
    6. AIMA Noticeboard
      1. EU Directive on Alternative Investment Fund Managers
      2. FSA Remuneration Code
      3. Short Selling
      4. US Dodd-Frank Wall Street Reform and Consumer Protection Act
      5. UK Stewardship Code
      6. Securities Law Directive
      7. EU Directive on Alternative Investment Fund Managers - Level II
      8. EU Directive on Markets in Financial Instruments (MiFID)
      9. International Financial Centres
      10. Bribery Act
      11. Market Abuse Directive
      12. MF Global
      13. FATCA
      14. FTT
      15. Other Tax Issues
    7. AIMA Regulatory Update
  3. Sound Practices
    1. Due Diligence Questionnaires
    2. Guides to Sound Practices
  4. Start-Up Service Providers
  5. Useful Websites