Commonwealth Numbered Regulations - Explanatory Statements
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CORPORATIONS AMENDMENT (STAMPING FEE EXEMPTION) REGULATIONS 2020 (F2020L00834)
EXPLANATORY STATEMENT
Issued by authority of the Treasurer
Corporations Act 2001
Corporations Amendment (Stamping Fee Exemption) Regulations 2020
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, or necessary or convenient to be prescribed for carrying out or giving effect to the Act.
The purpose of the Corporations Amendment (Stamping Fee Exemption) Regulations 2020 (the Regulations) is to prohibit the payment or receipt of stamping fees paid in respect of listed investment companies or listed investment trusts. This removes the incentive for financial services licensees or their representatives to mis-sell products to retail clients in order to increase their remuneration, resulting in poor consumer outcomes. It also ensures that licensees using fees for services models are not at a competitive disadvantage vis a vis licensees that receive stamping fees.
Stamping fees are upfront one-off commissions paid to financial service licensees or their representatives for their role in securing investors for a capital raising. Stamping fees create a conflict of interest as licensees or their representatives receive greater remuneration if they recommend that their clients make an investment. This potentially incentivises financial service licensees and representatives to recommend a product without appropriate regard to the features and characteristics of the product or the client's best interests.
The Regulations amend the Corporations Regulations 2001 to remove the exemption from the prohibition on paying and receiving conflicted remuneration for stamping fees paid in respect of listed investment companies and listed investment trusts. The exemption is retained for real estate investment trusts, infrastructure entities, and stapled real estate and infrastructure interests.
The amendments made by the Regulations apply to benefits given on or after 1 July 2020.
Public consultation on the Regulations was undertaken from 3 to 10 June 2020. Five submissions were received. Stakeholders were generally supportive of the Regulations. Minor amendments were made to the definition of infrastructure entities and real estate investment trusts post consultation to address stakeholders' concerns.
The States and Territories were also notified of the changes pursuant to clause 507 of the Corporations Agreement 2002. No State or Territory has objected to the amendments.
Details of the Regulations are set out in Attachment A.
The Regulations are a legislative instrument for the purposes of the Legislation Act 2003.
The Regulations commence on the day after registration on the Federal Register of Legislation.
Regulation Impact Statement (RIS)
Policy objective
Stamping fees can influence the provision of financial advice as they incentivise an adviser to recommend a product without appropriate regard to its features and characteristics, and without appropriately considering their best interests duty and other legal obligations. They also create a distortion in the funds management market that puts financial advice firms that use fees for service models at a competitive disadvantage, as they must compete with firms that can offer discounted pricing by supplementing revenue through stamping fee earnings.
Removing the stamping fee exemption for listed investment companies and listed investment trusts addresses risks associated with the potential mis-selling of these products to retail consumers and improves competitive neutrality in the funds management industry.
Implementation options
The RIS considered four options to address the concerns that stamping fees are incentivising stockbrokers and financial advisers to inappropriately recommend their clients buy into listed investment entities.
The four options were tested through the four-week public consultation announced on 27 January 2020, where the Government indicated that the consultation would inform its decision on whether to retain, remove or modify the stamping fee exemption.
Option 1: Retain the existing stamping fee exemption
Under this option, the current stamping fee exemption remains unchanged and listed investment entities can continue to pay Australian Financial Services (AFS) licensees or their representatives stamping fees for their role in securing investors for a capital raising.
Option 2: Remove the stamping fee exemption for all listed investment entities
This option would require an amendment to the law to remove the stamping fee exemption from the general prohibition on conflicted remuneration.
Option 3: Remove the stamping fee exemption for certain listed investment entities
This option would remove the stamping fee exemption only for listed investment entities where there is evidence of mis-selling potential and the related risk of consumer harm, balanced against the policy rationale for introducing the exemption in 2014.
Many of the concerns regarding the stamping fee exemption and the potential for consumer harm have related to listed investment companies (LICs) and listed investment trusts (LITs). This has been driven by evidence of underperformance of these investment entities and their growth in attracting retail investors. Other concerns include retail investors not understanding the risk of their investments, and that LICs and LITs show a pattern of discounts to net tangible asset (NTA) value soon after issuance. Option 4: Modifying the existing stamping fee exemption
This option would involve the introduction of a cap on stamping fees payable by listed investment entities. The modification option put forward by some stakeholders would be to maintain but modify the stamping fee exemption by imposing a maximum ceiling on any stamping fee payable by listed investment entities, in order to prohibit the charging of stamping fees in excess of what is considered to be an acceptable range.
Assessment of impacts
Option 1: Retain the existing stamping fee exemption
Impact on retail investors
Stamping fees create a risk of consumer harm as AFS licensees and their representatives are incentivised to recommend investments that attract a stamping fee without having due regard to the appropriateness of their features and characteristics, and without appropriately considering their best interests duty and other legal obligations.
The payment of a stamping fee from an issuer to an AFS licensee or their representative does reduce the upfront cost for a retail client when investing in a listed investment entity.
Impact on entities involved in issuances
This option is favoured by stakeholders who currently utilise the stamping fee exemption who submit that stamping fees have been the traditional way that advisers and stockbrokers have charged for the work that is done in analysing a potential offering and determining the appropriateness of a recommendation to their clients.
Impact on entities that do not access the stamping fee exemption
There are a number of entities in the funds management and financial adviser industry that either choose not to receive conflicted remuneration or are unable to take advantage of the stamping fee exemption. This leads to distortions in the market and puts those entities at a competitive disadvantage as firms that use fees for service models must compete with firms that can offer discounted pricing by supplementing revenue through stamping fee earnings.
Retaining the status quo will continue this distortion.
Option 2: Remove the stamping fee exemption for all listed investment entities
Impact on retail investors
Removal of the stamping fee exemption is expected to benefit consumers through better quality advice on investment options, as AFS licensees and their representatives are not incentivised to recommend listed investment products without having appropriate regard to their features and characteristics. It is also expected to lead to more transparent pricing as issuers would need to move to a fee for service model or client directed payment approach.
Retail investors wanting to invest in these entities would be expected to pay upfront fees for the advice they receive and any transaction costs. Having to pay upfront fees may deter some investors from seeking out these types of investments. Removal of the stamping fee may lead to certain issuers and AFS licensees or their representatives move to restrict retail investors from participating in listed investment entities given there are no restrictions on conflicted remuneration for wholesale investors.
Impact on entities involved in issuances
Removing the stamping fee exemption is expected to impact a number of industry participants operating in this market - stockbroking firms and related parties who specialise in the corporate finance and related advisory services and bring these offers to market.
Those who receive the stamping fee exemption will likely experience a decline in revenue in the short term and increase their administration costs over the medium term. Removal of the stamping fee does not prevent entities from adjusting their fee structure to recoup their costs through a more transparent process.
Other responses to the removal of the stamping fee exemption could include repricing strategies, such as increasing ongoing service fees to maintain cost recovery and margin, or adjusting the pricing of corporate finance services.
Impact on entities that do not access the stamping fee exemption
Removal of the stamping fee exemption is expected to benefit exchanged traded funds and other managed investment products that are in direct competition and do not benefit from the stamping fee exemption.
Option 3: Remove the stamping fee exemption for certain listed investment entities i.e. LICs and LITs
Impact on retail investors
Similar to option 2, option 3 is expected to benefit consumers through more price transparency and better quality advice on investment options. However, retail investors wanting to access LICs and LITs may have to pay upfront fees and there is a possibility that retail investors will be restricted from participating in LIC and LIT initial public offers if the stamping fee exemption were to be removed.
Impact on entities involved in issuances
Removing the stamping fee exemption is expected to impact a smaller set of industry participants operating in this market than for Option 2, with the vast majority of stamping fees received by approximately 14 entities and their advisers. Participants involved in the preparation and distribution of LIC and LIT offers would similarly be expected to experience a decline in revenue in the short term and would likely enter into alternative arrangements such as increase their administration costs or transparently charge investors for advice.
The removal of the stamping fee exemption for LICs and LITs is likely to increase the competitiveness of other investment products that do not benefit from the exemption. Therefore, removing the exemption may result in fewer new LICs and LITs being issued.
Impact on entities that do not access the stamping fee exemption
Similar to option 2, removing the stamping fee exemption for LICs and LITs would benefit entities who do not currently access the stamping fee exemption. Given the exemption would be retained for other listed investment entities some distortions will remain in the market and AFS licensees or their representatives may be incentivised to promote those entities that pay stamping fees.
Option 4: Modifying the existing stamping fee exemption
Impact on retail investors
Capping the amount of the stamping fee may modify but does not remove the incentive for an AFL licensee or their representative to recommend listed investment products without having appropriate regard to their features and characteristics, and therefore there remains the potential risk of mis-selling these investments to retail investors and the related consumer harm. The presence of a stamping fee exemption, even capped, will not lead to more transparent pricing and will continue to create a potential conflict of interest between the adviser and their client.
Therefore, there is likely to be only marginal differences in the benefit for retail investors between option 1 and option 4.
Impact on entities involved in issuances
A cap on stamping fees would represent a compromise between retaining and removing the stamping fee exemption, however, given the length of time required to implement a cap, its potential for introducing complexity into the law and the likelihood that many entities will still be required to adjust their fee structure, there is a risk it will create regulatory costs and a prolonged period of uncertainty for industry that may outweigh any benefits of introducing a cap.
Impact on entities that do not access the stamping fee exemption
Stakeholders who do not support a cap submit that the continued existence of the stamping fee exemption, even if capped, does not remove the distortion it creates in the managed funds market and the competitive disadvantage at which it puts firms that do not currently benefit from this exemption.
Analysis of costs/benefits
Option 3 is the preferred option as the regulatory intervention is only extended to listed investment entities where there is evidence of the potential for mis-selling with the associated risk of consumer harm, as is the case with LICs and LITs.
Absent the stamping fee exemption for LICs and LITs, retail investors are more likely to attain better outcomes through better risk adjusted portfolio returns with appropriate diversification as a result of investment recommendations based on their specific circumstances and risk appetite. Option 3 will also address a distortion in the funds management industry and create a more level playing field for competitor investment products that do not currently access the exemption.
The entities that are involved in marketing LICs and LITs are expected to be impacted negatively in the short term but previous experience when the stamping fee exemption did not apply indicates that these entities will be able to adjust their fee structure to comply with the policy change, for example, by adopting a fees for service model or client directed payment.
Other issues - consultation
Stakeholder feedback provided valuable insights regarding the operation of the stamping fee exemption, including the capital raising process, the fee structure relating to capital raisings, how stamping fees can influence the advice provided to clients, the impact of stamping fees on the efficiency and competitive dynamics of capital raisings, the performance of LIC/LIT products, and the potential risk of consumer harm where LIC and LIT public offers are mis-sold to retail clients. Feedback also revealed the different characteristics of listed investment entities (LICs, LITs, real estate investment trusts and listed infrastructure investments), and potential options for addressing the policy problem.
Conclusion and recommended option
The public consultation revealed that stamping fees can potentially create conflicts of interest for an AFS licensee or their representative to mis-sell a particular investment to a consumer, with continued issuing activity of LICs and LITs in the face of an ongoing discount to NTA indicating mis-selling potential. The specific consumer harm that arises when a LIC or LIT is mis-sold includes additional risk in individual investments relative to the client's risk profile and opportunity costs if a more suitable equivalent investment was available. Stamping fees also create a distortion in the funds management industry that disadvantages firms that use fees for service models, and may incentivise an adviser to recommend a product with appropriate regard to its features and characteristics and without appropriately considering their best interests duty and other legal obligations.
Removing the stamping fee exemption for LICs and LITs will address the conflicts of interest that stamping fees potentially create for an AFS licensee or their representative to mis-sell these products to a consumer, will improve competitive neutrality in the funds management industry by removing a distortion that disadvantage firms that use fees for service models, and encourage more compliant advice processes and practices.
Maintaining the existing treatment for other listed investment entities will ensure that the direct capital raising activities which support the economic activity of companies in the real economy are not impacted by this regulatory change. These other listed investment entities also generally have a fixed supply of underlying portfolio of assets limiting the total amount of capital that can be raised which moderates the potential amount that can be mis-sold.
The public consultation highlighted that there are different stakeholder views regarding the use of stamping fees and whether the current stamping fee exemption should be retained, removed or modified. The decision-making process assessed the evidence collected during the consultation and weighed the various arguments presented by stakeholders, concluding the best option is to limit the regulatory response to address areas where there are clear risks of consumer harm while maintaining existing treatment for direct capital raising activities which support the economic activity of companies in the real economy.
A statement of Compatibility with Human Rights is at Attachment B.
ATTACHMENT A
Details of the Corporations Amendment (Stamping Fee Exemption) Regulations 2020
Section 1 - Name of the Regulations
This section provides that the name of the Regulations is the Corporations Amendment (Stamping Fee Exemption) Regulations 2020 (the Regulations).
Section 2 - Commencement
Schedule 1 to the Regulations commence on the day after the instrument is registered on the Federal Register of Legislation.
Section 3 - Authority
The Regulations are made under the Corporations Act 2001 (the Act).
Section 4 - Schedule
This section provides that each instrument that is specified in the Schedule to this instrument is amended or repealed as set out in the applicable items in the Schedule, and any other item in the Schedule to this instrument has effect according to its terms.
Schedule 1 - Amendments to the Corporations Regulations 2001
Item 1
Item 1 amends the scope of the stamping fee exemption so as to exclude listed managed investment schemes and listed companies whose main purpose is investing in passive investment. The exemption has been retained for infrastructure entities and real estate investment trusts, along with stapled real estate and infrastructure interests.
The consequence of this amendment is that stamping fees paid in respect of listed investment companies and listed managed investment schemes on or after 1 July 2020 are conflicted remuneration and prohibited under Division 4 of Part 7.7A of the Act. Stamping fees paid in respect of infrastructure entities, real estate investment trusts, certain stapled interests and trading entities remain exempt from the definition of 'conflicted remuneration' and are permitted even if they are paid on or after 1 July 2020.
An entity is 'listed' if it is included in the official list of the Australian Stock Exchange or another financial market that is prescribed in regulation 1.0.02A of the Corporations Regulations 2001 (refer to section 9 of the Act).
Monetary remuneration paid on Exchange Trade Products, Exchange Traded Funds and managed funds that is not paid as part of an approved capital raising were not covered by the stamping fee exemption prior to the amendments made by these Regulations. The Regulations do not alter that position or include any new forms of remuneration within the scope of the exemption. Nor do they alter the definition of a 'stamping fee'.
Item 2
Item 2 of the Regulations inserts new definitions for infrastructure entity, real estate investment trust, stapled real estate or infrastructure interest, interest and passive investments.
An 'infrastructure entity' is a company or managed investment scheme whose main purpose is to operate or invest in:
• airports;
• electricity generation, transmission or distribution facilities;
• gas transmission or distribution facilities;
• hospitals;
• ports;
• prisons;
• railways;
• roads;
• sewerage facilities;
• telecommunication facilities; or
• water supply facilities.
A 'real estate investment trust' is a managed investment scheme whose main purpose is to invest in real property.
The definitions of an 'infrastructure entity' and a 'real estate investment trust' focus on the main purpose of the entity, rather than its day-to-day activities. This is consistent with the approach taken in other similar definitions in the ASX Listing Rules (such as the definition of 'property trust'). The purpose of an entity may be documented in its constitution, its prospectus (for a company) or its Product Disclosure Statement (for a managed investment scheme).
An interest is a 'stapled real estate or infrastructure interest' if:
• the interest is an interest in a company or a managed investment scheme;
• the interest can only be transferred together with one or more other interests in one or more companies, managed investment schemes or other entities; and
• the group of companies, managed investment schemes or other entities are engaging in activities together for the main purpose of investing in real property or operating or investing in infrastructure assets.
The first two limbs of the definition are based on the definition of stapled securities in section 1014G of the Corporations Act 2001, while the third limb draws on the new definitions of 'infrastructure entity' and 'real estate investment trust'.
Infrastructure entities, real estate investment trusts and stapled real estate and infrastructure interests are unaffected by the Regulations and may therefore continue to rely on the stamping fee exemption. In the case of stapled real estate and infrastructure interests, this result is achieved by applying the new law to 'interests' and defining an interest so as to exclude stapled real estate and infrastructure interests.
'Passive investments' are defined as:
• shares, units, options, rights or similar interests;
• financial instruments (such as loans, debts, debentures, bonds, promissory notes, futures contracts, forward contracts, currency swap contracts and a right or option in respect of a share, security, loan or contract);
• an asset whose main use by the company in the course of carrying on its business is to derive interest, an annuity, rent, royalties or foreign exchange gains unless:
- the asset is an intangible asset and has been substantially developed, altered or improved by the company so that its market value has been substantially enhanced; or
- the asset's main use for deriving rent was only temporary; and
• goodwill.
This definition is based on the list of permitted assets in the definition of 'listed investment company' in section 115-290 of the Income Tax Assessment Act 1997 (tax relief for shareholders in listed investment companies).
Trading companies do not invest in passive investments and may therefore continue to rely on the stamping fee exemption.
ATTACHMENT B
Statement of Compatibility with Human Rights
Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011
Corporations Amendment (Stamping Fee Exemption) Regulation 2020
This Legislative Instrument is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.
Overview of the Legislative Instrument
The Legislative Instrument amends the Corporations Regulations 2001 to remove the exemption from the prohibition on paying and receiving conflicted remuneration for stamping fees paid in respect of listed investment companies and listed investment trusts. The exemption is retained for those listed investment companies and listed investment trusts that are real estate investment trust and infrastructure entities, as well as stapled real estate and infrastructure interests.
Human rights implications
This Legislative Instrument does not engage any of the applicable rights or freedoms.
Conclusion
This Legislative Instrument is compatible with human rights as it does not raise any human rights issues.