EXPLANATORY STATEMENT
Select Legislative Instrument 2008 No. 130
Issued by the authority of the Assistant Treasurer
Corporations Act 2001
Corporations Amendment Regulations 2008 (No. 3)
Section 1364 of the Corporations Act 2001 (the Act) provides that the Governor‑General may make regulations prescribing matters required or permitted by the Act to be prescribed by regulations, or necessary or convenient to be prescribed by such regulations for carrying out or giving effect to the Act.
Section 949B of the Act provides that the regulations may impose disclosure requirements or additional disclosure requirements in certain situations, including where a financial service is provided to a person as a wholesale client.
The Regulations relate to the regulation of discretionary mutual funds (DMFs) and direct offshore foreign insurers (DOFIs) and are consequential to the Financial Sector Legislation Amendment (Discretionary Mutual Funds and Direct Offshore Foreign Insurers) Act 2007 (the DMF/DOFI Act).
DMFs provide an insurance-like product offering ‘discretionary cover, that is a means of risk management that is alternative to insurance’. Unlike traditional insurance the DMF does not have a contractual obligation to meet a claim if a risk eventuates. Instead, the DMF has a contractual obligation to consider the claim and a discretion as to whether it meets the costs of the claim.
DOFIs are foreign general insurers currently offering general insurance products to Australians without being authorised in Australia because they are not considered to be ‘carrying on insurance business in Australia’ under the Insurance Act 1973.
The DMF/DOFI Act requires DOFIs operating in the Australian general insurance market to be authorised insurers and subject to Australia's prudential regime. From 1 July 2008, it will be an offence for a DOFI to carry on insurance business in Australia without being authorised and for an Australian Financial Services Licence (AFSL) holder to deal in general insurance products that are not issued by an authorised insurer or a Lloyd’s underwriter, unless an exemption applies. The DMF/DOFI Act also provides for data to be collected from DMFs to enable Government, regulators and industry to better understand their use and operation. Within three years of the start of this collection, the Government will review the operation of DMFs to determine whether prudential regulation is necessary.
The DMF/DOFI Act introduces a limited exemption mechanism to enable insurance business that cannot be appropriately written in Australia to be supplied by a DOFI.
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The purpose of the Regulations is to extend consumer protection measures to wholesale clients of DMFs and DOFIs.
The Regulations have been the subject of extensive consultation with a range of stakeholders. In 2003, the Review of Discretionary Mutual Funds and Direct Offshore Foreign Insurers (the Potts Review) was conducted. After further consultation, a Treasury discussion paper was released in 2005 seeking stakeholders’ views on how to implement the review’s recommendations. Treasury conducted ongoing consultation with industry in the development of the DMF/DOFI Act.
The Regulations specify that AFSL holders are required to provide:
• wholesale clients with a notice about the risks of using an offshore insurer where business is placed under the atypical and customised exemptions (regulations 4C and 4D Insurance Regulations 2002); and
• a Product Disclosure Statement to wholesale clients of a DMF.
Details of the Regulations are set out in the Attachment.
The Act specifies no conditions that need to be satisfied before the power to make the Regulations may be exercised.
The Regulations are a legislative instrument for the purposes of the Legislative Instruments Act 2003.
The Regulations commence on 1 July 2008, to coincide with the commencement of Schedule 2 of the DMF/DOFI Act.
Authority: Section 1364 of the Corporations Act 2001
ATTACHMENT
Details of the Corporations Amendment Regulations 2008 (No. 3)
Regulation 1 – Name of Regulations
This regulation provides that the title of the Regulations is the Corporations Amendment Regulations 2008 (No. 3).
Regulation 2 – Commencement
This regulation provides for the Regulations to commence on 1 July 2008, to coincide with the commencement of Schedule 2 of the Financial Sector Legislation Amendment (Discretionary Mutual Funds and Direct Offshore Foreign Insurers) Act 2007.
Regulation 3 – Amendment of Corporations Regulations 2001
This regulation provides that the Corporations Regulations 2001 (the Principal Regulations) are amended as set out in Schedule 1.
Schedule 1 – Amendments
Item [1] – Regulations 7.7.20A - Extension of disclosure requirements to wholesale clients dealing with certain unauthorised insurers
This regulation requires a notice to be issued to a person, who is a wholesale client, where a policy is placed with an unauthorised foreign insurer (UFI) under the atypical or customised exemption under regulation 4C or 4D of the Insurance Regulations 2002.
The notice must set out that:
• the insurer is not an authorised insurer under the Insurance Act 1973;
• the insurer is not subject to financial supervision in Australia; and
• the wholesale client should consider seeking further information about the country in which the insurer is incorporated, whether there is financial supervision of insurers in that country, the paid up capital of the insurer and which country’s laws will be used in disputes in relation to the policy.
This will mean that consumers have greater information about the risks of using an UFI and can make more informed decisions. This notice replicates the notice that must be given to retail clients under Corporations Regulation 7.9.15.
An Australian Financial Services Licence (AFSL) holder must give this notice when they deal in the product or when they provide advice and would be required to give a Statement of Advice if the client was a retail client.
Item [2] – Division 2BA Product Disclosure Statements for discretionary mutual funds
This regulation extends the obligation to provide a Product Disclosure Statement (PDS) to wholesale clients of DMFs.
The form of the PDS must by the same as the PDS that would be given to a retail client.
This will ensure that wholesale clients will have better information about the risks and benefits of DMFs so as to make more informed decisions. DMFs provide an insurance-like product offering ‘discretionary cover’. Unlike traditional insurance the DMF does not have a contractual obligation to meet a claim if a risk eventuates. Instead, the DMF has a contractual obligation to consider the claim and a discretion as to whether it meets the costs of the claim. DMFs provide a means of risk management that is an alternative to insurance.