New government
Following the ALP’s election win:
- Senator Nick Sherry has become the new Minister for Superannuation and Corporate Governance
- Wayne Swan MP, the new Treasurer, and
- Chris Bowen MP, the Assistant Treasurer and Minister for Competition Policy and Consumer Affairs.
Some of the ALP’s stated policies regarding superannuation during the election campaign include:
- to reduce the complexity of the choice regime for small business
- to establish an optional superannuation clearing house for all businesses, and
- to introduce a ‘simple, standard disclosure form’ for financial services products. This new form, which is promised to reflect different products and providers, is to be included in regulations by December 2008.
Anti-money laundering and counter-terrorism financing
From 12 December 2007, any business which delivers a service which is regulated under the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (Act), must have its AML/CTF program in place. The AML/CTF program involves establishment and documentation of the processes the business has developed to collect and verify information from its customers regarding their identities.
AUSTRAC has launched new educational web pages to assist businesses in complying with the Act, including:
- e-learning courses
- industry-specific resources (including superannuation), and
- reference materials.
AUSTRAC Online is now available. This is a new internet-based system designed to assist businesses with their regulatory and reporting obligations under the Act. Features include a tailored AML/CTF compliance report which is based on business type or industry sector and the designated services the business provides.
Professional insurance requirements for AFS licensees
Corporations Regulations 7.6.02AAA sets out the new requirements for compensation arrangements for AFS licensees providing financial services to retail clients pursuant to section 912B of the Corporations Act. For existing licensees, from 1 July 2008 the licensee must hold professional indemnity insurance cover that:
- is adequate having regard to:
- the licensee’s membership of an external dispute resolution scheme (EDR Scheme), taking account of the maximum liability that has a realistic potential of arising in connection with any particular claim against the licensee and all claims in respect of which the licensee could be found to have liability
- other relevant considerations in relation to the licensee, including the volume of its business, the number and kind of its clients, the kind of business and the number of authorised representatives, or
- is approved by ASIC as an alternative arrangement.
On 27 November 2007, ASIC released new Regulatory Guide 126 entitled Compensation and insurance arrangements for AFS licensees which details ASIC’s implementation of the new compensation requirements under section 912B of the Corporations Act. This Regulatory Guide results from ASIC’s Consultation Paper 87 and industry comments on that Consultation Paper.
ASIC will be administering the new requirements in a staged approach:
- Minimum standards (as set out in the Regulatory Guide) will apply to existing trustees from 1 July 2008 (1 January 2008 for new trustees) during the implementation period. The implementation period will run from 1 January 2008 to 31 December 2009.
- From 1 January 2010, all licensees will be expected to comply with the higher standards as detailed in the Regulatory Guide.
The Regulatory Guide explains that it is the responsibility of each licensee to determine whether their PI insurance is adequate and details the following guidelines for determining adequacy of PI insurance arrangements from 2010:
- The list of factors in Regulation 7.6.02AAA is not exhaustive. Licensees should have regard to any additional matters which impact the adequacy of their PI insurance.
- The limit of liability should cover a reasonable estimate of retail clients’ potential loss or damage due to breaches of obligations under Chapter 7 by the licensee and its representatives. The Regulatory Guide notes that an estimate of claims under the EDR Scheme may not be an accurate guide as claims may be brought outside the EDR Scheme, such as through the courts. This is particularly true in the superannuation context where the SCT does not impose a monetary limit on claims.
- The terms and exclusions under the policy should be carefully examined.
- The licensee must have the necessary financial resources to support the policy including payment of any excess.
- The adequacy of PI insurance should be assessed on an ongoing basis.
- Licensees may consider that some types of trustee liability insurance held by superannuation trustees fall within the category of PI insurance.
- The ‘maximum liability’ can be estimated using a ‘worst loss scenario’ per client along with an estimate of the number of claims during the policy period and the potential for multiple claims.
Table 4 of the Regulatory Guide provides a checklist for what an adequate PI insurance policy should cover from 2010. The minimum requirement for the amount of cover is based on ‘revenue’ (revenue for this purpose is to have the same meaning as in AASB118).
However there is a recognition that some trustees will require a higher amount of cover. This will clearly be the case for trustees of not for profit superannuation funds. The minimum requirement for ‘run-off cover’ will be 12 months.
Licensees can only use a foreign insurer after 1 July 2008 if the insurer is regulated by APRA or exempted under the Financial Sector Legislation Amendment (Discretionary Mutual Funds and Direct Offshore Foreign Insurers) Act 2007.
For the implementation period policy from 1 July 2008 (1 January 2008 for new licensees) Table 5 of the Regulatory Guide provides a checklist of minimum standards.
Trustees of superannuation funds should act quickly to confirm whether their existing PI insurance satisfies the implementation period policy requirements from 1 July 2008 and be mindful of the more extensive requirements which will operate from 1 January 2010 in renegotiating any new policies.
Trustees of superannuation funds who have alternative compensation arrangements in place (ie self-insurance or indemnification by an employer-sponsor) may seek approval of their alternative arrangement by making a submission to ASIC in the prescribed manner.
More information
For information regarding possible implications for your business, contact a member of the Financial Services team.