ASIC CLASS ORDER [05/737]

EXPLANATORY STATEMENT

Prepared by the Australian Securities and Investments Commission

Corporations Act 2001

Paragraph 601QA(1)(a) and subsection 765A(2) —Exemption and Declaration

Section 601QA(1)(a) of the Corporations Act 2001 (the Act) provides that the Australian Securities and Investments Commission (ASIC) may exempt a person or class of persons from specified provisions of Chapter 5C of the Act.

Section 765A(2) of the Act provides that ASIC may declare that a specified facility, interest or other thing is not a financial product for the purposes of Chapter 7 of the Act.

1. Background

Section 763D of the Act provides that a person makes non-cash payments if they make payments, or cause payments to be made, otherwise than through the physical delivery of Australian or foreign currency in the form of notes and/or coins. The facility through which, or through the acquisition of which, a person makes such payments is a financial product: s763A(1)(c).

This means that if a person carries on a financial services business involving dealing in, or providing financial product advice on, a non-cash payment (NCP) facility in Australia, the person must hold an Australian financial services licence unless an exemption applies. Parts 7.7, 7.8 and 7.9 of the Act impose conduct and disclosure obligations on persons who provide financial product advice or deal in a financial product. The Act also prohibits the hawking of financial products to retail clients.

ASIC issued its Policy proposal paper Non-cash payment facilities (Non-cash payment facilities PPP) in December 2004. The Non-cash payment facilities PPP set out how ASIC proposed to regulate non-cash payment facilities and sought feedback from interested parties. (The Non-cash payment facilities PPP may be accessed at http://www.asic.gov.au.)

The Australian Government released its proposals paper Refinements to Financial Services Regulation on 2 May 2005. The proposals paper noted there is ‘[u]ncertainty as to whether loyalty schemes, retailer gift vouchers and certain low-value non-cash payment facilities are intended to be regulated under the financial services regime’. (This paper may be accessed at http://www.treasury.gov.au.) In response, ASIC announced it would issue guidance and/or relief to deal with the unintended application of the non-cash payment facility definition to certain kinds of facilities as part of its project on the regulation of non-cash payment facilities (see Information Release [IR 05-22] ASIC provides details on financial services refinement projects (12 May 2005), which can be accessed at http://www.asic.gov.au).

Loyalty schemes are schemes that are operated by, or on behalf of an issuer and are designed to encourage the purchase or use of goods and/or services of the issuer or other parties participating in the scheme.

2. Purpose of the class order

The purpose of Class Order [CO 05/737] is to declare that a loyalty scheme is not a financial product for the purposes of Chapter 7 of the Act. Such schemes are generally simple, easy-to-use and well understood by retail consumers. They are usually issued at limited (if any) cost to the client and as marketing tools ancillary to other services (such as credit). Accordingly, it appears that Parliament did not intend loyalty schemes to be caught by the financial services regulatory regime in Chapter 7 of the Act and that regulation of such schemes under the financial services regulatory regime is unnecessary and inappropriate.

In addition, unconditional relief from Chapter 5C of the Act is available where a loyalty scheme constitutes a managed investment scheme.

3. The class order

Under [CO 05/737], loyalty schemes are not financial products for the purposes of Chapter 7 of the Act where:

(a) their sole or main purpose is to promote spending on the goods and/or services of the issuer or third parties participating in the scheme;

(b) clients are allocated a measure of value (credits) as a result of acquiring or using goods and/or services of the issuer or third parties participating in the scheme, whether or not a monetary value is expressly attributed to the credits;

(c) the credits can be used to make a payment or part payment for goods or services or to obtain some other benefit; and

(d) the scheme is not part of another financial product.

This means the financial services licensing, conduct and disclosure requirements (including the anti-hawking provisions) and Part 7.10 of the Act will not apply to a loyalty scheme.

If applicable, such a scheme will also be exempt from the requirement to be registered as a managed investment scheme under Chapter 5C of the Act.

4. Consultation

In response to the Non-cash payment facilities PPP, we received 27 submissions, eight of which directly and primarily addressed issues confronting loyalty scheme providers. Those submissions were taken into account in the development of [CO 05/737].

ASIC has also taken into account the Australian Government’s proposals paper Refinements to Financial Services Regulation (2 May 2005).

In addition, a Regulation Impact Statement (RIS) was prepared for ASIC’s proposed Policy Statement 185 Non-cash payment facilities [PS 185] before [CO 05/737] was made. The RIS is attached to this statement.