In brief
The exposure draft of the Corporations Legislation Amendment (Financial Services Modernisation) Bill 2009 (Bill), which was released on 6 May 2009, proposes to amend the Corporations Act 2001 (Cth) (Corporations Act) by inserting a new Chapter 5D in the Corporations Act.
The Bill proposes to:
- transfer regulation of trustee companies from the states and territories to the Commonwealth, and
- establish a national consumer protection and disclosure regime.
The key features of the new legislation are:
- Trustee companies will be empowered to provide ‘traditional trustee company services’ (Traditional Trustee Services), deemed to be ‘financial services’ for the purposes of the Corporations Act, that may otherwise be provided only by individuals.
- ASIC will regulate trustee companies in the provision of Traditional Trustee Services.
- Companies that are not trustee companies will be prohibited from providing Traditional Trustee Services.
- Consumer protection provisions of the Corporations Act and the ASIC Act will apply to trustee companies (licensing, conduct, disclosure, advice and dispute resolution).
- The new legislation will regulate fees that trustee companies may charge and the way fees are disclosed.
Submissions on the Bill are due by Friday 29 May 2009 and the Bill is expected to be introduced into Parliament in June 2009.
Further detail on each of these aspects is set out below.
Scope of the Bill – Traditional Trustee Services
The Bill regulates the provision of the so called ‘traditional services’ of trustee companies, which are defined in the Bill as follows:
| Services within the scope of the Bill (Traditional Trustee Services) |
Services outside of the scope of the Bill |
The services include:
- estate management functions, which include acting as:
- a trustee or otherwise administering or managing a trust
- executor or administrator of a deceased estate
- agent, attorney or nominee
- manager or administrator of the estate of an individual who lacks capacity to manage his or her affairs
- financial guardian of the estate of a minor, or
- receiver or custodian of property of a person.
- preparing a will, a trust instrument, a power of attorney or an agency arrangement
- applying for probate of a will, applying for grant of letters of administration, or electing to administer a deceased estate, and
- establishing and operating common funds.
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The Bill does not regulate the provision by trustee companies of services which are not Traditional Trustee Services.
These services include, for example:
- acting as a superannuation trustee or a responsible entity for managed funds
- acting as a debenture trustee, and
- providing a custodial or depository service.
These services will continue to be regulated under the Superannuation Industry (Supervision) Act 1993 (Cth), the Managed Investments Act 1998 (Cth) and the existing provisions of the Corporations Act. |
The regulations may also provide for other services in addition to the services listed above.
The Bill describes in detail the functions and powers of trustee companies in relation to Traditional Trustee Services.
Interaction between Commonwealth and state and territory laws
The Bill intends to preserve rules which apply generally to persons such as trustees, executors, administrators and guardians (including natural persons and trustee companies when they perform these roles). These rules are located in state and territory legislation, the common law and equity.
The Federal Government is seeking specific feedback on the suitability of the interaction between the proposed Commonwealth provisions and state and territory laws.
What is the impact of the Bill on trustee companies?
Chapter 7 of the Corporations Act extended to Traditional Trustee Services
The Bill extends Chapter 7 of the Corporations Act to the provision of Traditional Trustee Services by providing that the ‘provision by a trustee company of traditional trustee company services’ constitutes the provision of a financial service.
This means that trustee companies will be required to hold an Australian financial services licence (AFSL) with a specific authorisation allowing them to provide Traditional Trustee Services.
Trustee companies will be subject to certain requirements under Chapter 7, including:
- compliance with general conduct standards, including the requirement to deal with beneficiaries efficiently, honestly and fairly, manage conflicts of interest and ensure that their representatives are appropriately trained and qualified in relation to the provision of Traditional Trustee Services
- trustee companies will need to have suitable dispute resolution arrangements (both internal and external) if they provide Traditional Trustee Services to retail clients (see below for proposed amendment to the definition of retail client), and
- trustee companies will be subject to enforcement provisions in relation to false and misleading statements and engagement in dishonest, misleading or deceptive conduct.
Proposed amendments to Chapter 7
The Bill also proposes to amend Chapter 7 to integrate the regulation of the provision of Traditional Trustee Services under Chapter 7. Proposed amendments include:
- amendment to the definition of retail client to provide that Traditional Trustee Services are always provided to persons as retail clients. This means that investors who would normally be categorised as wholesale or sophisticated investors will be deemed to be retail clients for the purposes of the provision of Traditional Trustee Services. The regulations will provide flexibility to make special provisions in relation to particular clients
- amendment to section 914A providing that ASIC can only give a licence to a trustee company if it provides all, and not only some, Traditional Trustee Services. This reflects a policy decision to license only trustee companies who will provide the full range of Traditional Trustee Services, and
- the Federal Government is also seeking specific feedback on what should be the extent of the disclosure and other obligations of trustee companies, whether the new legislation should require the provision of a statement of advice to retail clients, and whether there should be distinct content requirements for financial services guides (FSGs) specific to Traditional Trustee Services.
Trustee companies who already hold an AFSL for other purposes will need to review their policies and procedures in light of the new requirements to ensure that they comply with their obligations as AFSL holders in relation to the provision of Traditional Trustee Services.
Trustee companies who do not currently hold an AFSL will need to apply for an AFSL.
Liability of officers and employees of trustee companies
It is the intention of the Bill that state and territory laws providing for personal liability of directors of trustee companies are repealed and replaced with new rules under the Bill and existing Corporations Act provisions.
The Bill expressly imposes duties of loyalty, good faith, care, skills and diligence on officers of trustee companies. The Bill also imposes a negative duty on employees of trustee companies to avoid conflicts of interest.
Both civil and criminal penalties apply for a contravention of the duties set out above.
Regulation of fees charged by trustee companies
The Bill regulates the fees that trustee companies are able to charge their clients for Traditional Trustee Services. As explained above, the Bill only regulates Traditional Trustee Services. Consequently, fees that trustee companies charge for services other than Traditional Trustee Services are outside of the scope of the new legislation.
The general approach to the regulation of fees includes:
| General principles about charging fees |
- The trustee company must ensure that an up-to-date schedule of its fees (for Traditional Trustee Services only) is disclosed on a website maintained by or on behalf of the trustee company.
- Fees must also be disclosed in any FSGs provided to clients.
- If fees change, the trustee company must within 21 days of the change taking effect notify the client of the change.
- The trustee company is entitled to be reimbursed for all disbursements properly made.
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| Deregulation of the fees charged to new trusts and estates (other than charitable trusts) |
- The trustee company must not charge more than the fees specified in its published fee schedule at the time it begins administration.
- The parties are able to negotiate (or contract out) either higher or lower fees, than the amount set in the most recent published schedule of fees.
- The deregulation does not apply to the provision of any service that started before commencement of the new legislation.
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| Estate management services fees |
These fees may be paid out of the capital or income of the relevant estate except for:
- the annual management fee, and
- any common fund administration fee,
payable in relation to new charitable trusts, which can only come out of the income of the relevant estate or common fund. |
| Fees charged to new charitable trusts |
- In relation to its services as trustee or manager, the trustee company may only charge the following fees:
- up to 5.5 per cent of the gross value of the trust assets (including GST) (capital commission) and up to 6.6 per cent of the income received on trust assets (including GST) (income commission). The capital commission may only be charged once during the period the trustee company is trustee or manager of the trust, or
- up to 1.056 per cent of the gross value of the trust assets (including GST) (annual management fee).
- It is possible to contract out of the above limits on fees. This means that the fee limits set out in the Bill are default fees which will only apply where there is no agreement between the parties as to the fees that are charged. The trustee company and the interested parties can agree on higher or lower fees than these set out in the Bill.
- If trust assets are included in a common fund operated by the trustee company, the trustee company may charge an annual common fund administration fee of up to 1.1 per cent of the gross value of the trust assets in the fund.
- The trustee company may also charge fees for the preparation of returns.
- The Federal Government is committed to a review of the fee arrangements in relation to charitable trusts after two years of operation.
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| Fees charged to existing charitable trusts |
- The new regulation of fees will not affect existing clients unless trust assets are included in a common fund. In this case, the trustee company may charge an annual common fund administration fee capped as set out above.
- The Federal Government is committed to a review of the fee arrangements in relation to charitable trusts after two years of operation.
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The Federal Government is seeking specific feedback on certain fee related issues, including:
- whether record keeping obligations should apply to trustee companies in relation to their fees
- whether there should be distinct content requirements for FSGs specific to Traditional Trustee Services, in particular given that the trustee company will be required to provide an FSG to all its clients (only in relation to Traditional Trustee Services). This is because the Bill intends that Traditional Trustee Services are always provided to persons as retail clients (please see above under section 3.1), and
- whether the provisions allowing the parties to contract out of fee limits are appropriate.
Other changes
The Bill also deals with:
- a 15 per cent voting power limit on control of trustee companies, which is consistent with existing provisions under state and territory laws. The Bill empowers ASIC to approve applications to exceed the 15 per cent limitation, and
- the consequences of cancelling a licensed company’s AFSL. The Bill sets out the process for the compulsory transfer of estate assets and liabilities to another licensed trustee.
Timing and application
The Corporations Act will apply to trustee companies within six months from the day the new act receives royal assent. The exact date will be fixed by proclamation.
Transitional provisions will commence on royal assent, which provide that:
- a trustee company (that is listed in the regulations), and that, at that time, already holds an AFSL, is taken to be authorised under its AFSL to provide Traditional Trustee Services for a period of six months starting on the date of commencement of the regulations providing the list of trustee companies
- certain requirements under Chapter 7, including provisions relating to FSGs and statements of advice do not apply during the same period, and
- the provisions regarding the disclosure to clients of changed fees also do not apply during this period except for the requirement that the trustee company discloses its current schedule of fees on a website maintained by or on behalf of the company.
At the end of the six-month period, a trustee company can only provide Traditional Trustee Services if it has obtained an AFSL. On this basis, ASIC applications for obtaining or amending an AFSL will need to be made sufficiently in advance of the six-month deadline.
The Exposure Draft of the Bill is available online.1
This article was written by Dorothy Mioduszewska, Legal Associate admitted in Paris, Sydney.
Endnotes
1. Website of The Treasury
More information
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