EXPLANATORY STATEMENT for
ASIC Corporations (Financial Reporting: Natural Person Licensees) Instrument 2017/307
and
ASIC Corporations (Repeal) Instrument 2017/308
Prepared by the Australian Securities and Investments Commission
Corporations Act 2001
The Australian Securities and Investments Commission (ASIC) makes ASIC Corporations (Financial Reporting: Natural Person Licensees) Instrument 2017/307 (the Instrument) and ASIC Corporations (Repeal) Instrument 2017/308 (the Repeal Instrument) under paragraph 992B(1)(a) of the Corporations Act 2001 (the Act).
Section 992B(1)(a) provides that ASIC may exempt a person or a class of persons from Part 7.8 of the Act.
Under subsection 33(3) of the Acts Interpretation Act 1901 (as in force as at 1 January 2005 and as applicable to the relevant powers because of section 5C of the Act), where an Act confers a power to make, grant or issue any instrument (including rules, regulations or by-laws), the power shall be construed as including a power exercisable in the like manner and subject to the like conditions (if any) to repeal, rescind, revoke, amend, or vary any such instrument.
- Background
Subsection 989B(1) of the Act provides that Australian financial services (AFS) licensees must, in respect of each financial years, prepare a true and fair profit and loss statement and a balance sheet. Where the AFS licensee is a natural person, these statements and balance sheets may include expenses and revenues that are unrelated to their financial services businesses, such as income from other sources and personal expenses.
In September 2003, ASIC issued Class Order [CO 03/748] Reporting requirements under s 989B ([CO 03/784]). [CO 03/748] was issued to address concerns around the disproportionate burden placed on AFS licensees who are natural persons. [CO 03/748] limits the operation of subsection 989B(1) of the Act by relieving AFS licensees who are natural persons from the requirement to include in a profit and loss statement or balance sheet any revenues and expenses that do not relate to the financial services businesses carried on by the licensees.
The relief [CO 03/748] provides is confined to the preparation of profit and loss statements. An AFS licensee who is a natural person must still prepare a balance sheet, which discloses all of their assets and liabilities, including personal assets and liabilities, and the assets and liabilities of any other businesses; per subsection 989B(2) of the Act. An AFS licensee who is a natural person must still with the statement and balance sheet, lodge an auditor's report with ASIC containing the information and matters required by the regulations, per subsection 989B(3) of the Act.
2. Purpose of the instrument
The purpose of the Instrument is to preserve the effect of [CO 03/748] beyond its sunset date of 1 October 2017 in substantially the same form. But for the Instrument, the relief in [CO 03/748] would cease to have effect from 1 April 2017 under the Legislation Act 2003.
The Repeal Instrument is made to repeal the relief provided by [CO 03/748].
3. Operation of the instrument
Part 1 – Preliminary
Section 1 provides that the name of the Instrument is to be ASIC Corporations (Financial Reporting: Natural Person Licensees) Instrument 2017/307.
Section 2 provides that the Instrument is to commence the day after it is registered on the Federal Register of Legislation.
Section 3 provides that the instrument is made under subsection 992B(1) of the Act.
Section 4 outlines the relevant definitions for key terms used in the instrument. 'Act' is defined as meaning the Corporations Act 2001.
Part 2 – Exemption
Section 5 provides that a financial services licensee who is a natural person does not have to comply with subsection 989B(1) of the Act to the extent that the licensee is required to include in a profit and loss statement any revenues and expenses that do not relate to a financial services business carried on by the licensee.
Section 5 reflects ASIC's general intention regulate only the revenues and expenses included in include in profit and loss statements or balance sheets that relate to the financial services businesses carried on by AFS licensees.
4. Consultation
As part of its review of [CO 03/748], ASIC released Consultation Paper 278 Remaking ASIC class order on reporting requirements for AFS licensees who are natural persons (CP 278). A draft of the Instrument was attached to CP 278. ASIC did not receive any submissions in response to CP 278.
Overview
The ASIC Corporations (Financial Reporting: Natural Person Licensees) Instrument 2017/307 and the ASIC Corporations (Repeal) Instrument 2017/308 were enacted in 2017 by the Australian Securities and Investments Commission (ASIC) under the Corporations Act 2001. These instruments aim to address the disproportionate burden placed on Australian financial services (AFS) licensees who are natural persons, specifically in relation to the preparation of profit and loss statements and balance sheets. The primary objective is to exempt natural person licensees from including in their profit and loss statements any revenues and expenses unrelated to their financial services businesses, thereby aligning the regulatory requirements more closely with the actual scope of their business activities. The introduction of these instruments preserves the effect of the previously issued Class Order [CO 03/748] beyond its sunset date, ensuring that natural person licensees continue to benefit from the relief it provides.
Scope and Application
The ASIC Corporations (Financial Reporting: Natural Person Licensees) Instrument 2017/307 applies to natural person licensees of Australian financial services (AFS), as defined under the Corporations Act 2001. These individuals are exempted from certain financial reporting requirements, specifically the inclusion of revenues and expenses unrelated to their financial services business in their profit and loss statements, while still being required to prepare a balance sheet that discloses all assets and liabilities. The Instrument ensures that the relief provided by Class Order [CO 03/748] continues beyond its sunset date of 1 October 2017. The geographic reach of this legislation is national, as it pertains to AFS licensees operating anywhere within Australia. The ASIC Corporations (Repeal) Instrument 2017/308 repeals the relief provided by Class Order [CO 03/748], effectively ending the exemption from including non-financial service related revenues and expenses in profit and loss statements for natural person AFS licensees. This repeal is effective from the date of the Instrument’s registration on the Federal Register of Legislation.
Key Provisions
The main operative sections of the ASIC Corporations (Financial Reporting: Natural Person Licensees) Instrument 2017/307 (the Instrument) concern the exemption of certain financial reporting requirements for natural person financial services licensees under the Corporations Act 2001 (the Act). Specifically, section 5 of the Instrument exempts natural person licensees from the obligation to include revenues and expenses unrelated to their financial services business in their profit and loss statements (subsection 989B(1) of the Act). This exemption is designed to reduce the administrative burden on natural person licensees without compromising the transparency and accountability required under the Act. The Instrument also requires natural person licensees to prepare a balance sheet that includes all personal and business assets and liabilities, as per subsection 989B(2) of the Act, and to lodge an auditor's report with ASIC, as per subsection 989B(3) of the Act.
The Instrument imposes certain obligations on natural person financial services licensees. Firstly, while they are exempt from including non-financial services related revenues and expenses in their profit and loss statements, they must still prepare a comprehensive balance sheet that includes all their assets and liabilities, whether personal or business-related. This requirement ensures that the full financial picture of the licensee is still disclosed. Secondly, natural person licensees must still lodge an auditor's report with ASIC. This report must contain the information and matters required by the regulations, ensuring that the financial statements are independently verified. These obligations are crucial for maintaining the integrity and transparency of financial reporting for natural person licensees.
The Instrument does not explicitly outline specific offences, penalties, or civil/criminal consequences for breaches. However, it operates under the broader framework of the Corporations Act 2001, where non-compliance with financial reporting requirements can lead to penalties. Under the Act, failure to comply with financial reporting obligations can result in significant fines and, in severe cases, criminal charges. The maximum penalties for breaches can vary depending on the nature and severity of the offence, but they can include substantial fines for companies and individuals, as well as imprisonment for directors and officers found guilty of serious breaches. Therefore, while the Instrument itself does not detail these consequences, licensees must be aware of the potential repercussions under the overarching Act.