New proxy reforms: Senate Committee flags concerns, calls on Treasurer to provide answers

3 minute read  02.02.2022 Kate Hilder, Siobhan Doherty

The Senate Standing Committee for the Scrutiny of Delegated Legislation has raised concerns about new proxy reforms introduced by Treasury Laws Amendment (Greater Transparency of Proxy Advice) Regulations 2021.  

Key takeouts

Recap: What are the changes?

Broadly, the Treasury Laws Amendment (Greater Transparency of Proxy Advice) Regulations 2021 (Regulations) extend Australian Financial Services (AFS) licensing requirements to a broader range of proxy adviser activities and introduce new requirements for:
  • proxy advisers to provide entities that are the subject of proxy advice with a copy of the advice, on the same day it is provided to the client.  
  • proxy advisers to be independent of their clients. 

The Regulations also amend the Superannuation Industry (Supervision) Regulations 1994 (SIS Regulations) to introduce a new requirement for Registrable Superannuation Entity (RSE) licensees to make publicly available on  their website a detailed summary of how they have exercised their voting rights.  

The initial response to the Regulations has been mixed with proxy advice firms questioning the rationale for the reforms, the method of introduction and the short timeframe for implementation – the Regulations were made just days for Christmas – as well as raising concerns about their potential impact.  

Likewise the Australian Shareholder Association has raised concerns that the changes 'could undermine the ability of shareholders to hold companies to account, reducing confidence in markets and potentially an individual’s retirement funds and threatening Australia’s economic health'.

Conversely the Business Council of Australia has expressed support for the changes.  

The AFR reports that Senator Rex Patrick has also indicated that he plans to move a disallowance motion on 10 February 2022.  If this were to occur and if the motion is agreed to, the Regulations would be 'disallowed' which would mean that they would cease to have effect.   

If a notice of motion to disallow is not resolved or withdrawn within 15 sitting days after having been given, the Regulations would be deemed to have been disallowed and would cease to have effect.

Senate Committee has raised concerns with the Treasurer 

The Chair of the Senate Standing Committee for the Scrutiny of Delegated Legislation (Committee) wrote to the Treasurer on the 27 January 2022 outlining a number of concerns about the design and drafting of the Regulations and seeking responses from him to several questions (see: Committee Correspondence p21).  

Broadly, the Committee's chief concern appears to be that in light of the significance of the reforms and their likely impact on industry, it would have been preferable for them to be introduced through primary legislation rather than through regulation.  A concern that has previously been raised by industry (eg ACSI).  

Below is a brief summary of the Committee's concerns and the questions on which the Committee has sought responses from the Treasurer. 

Why introduce the reforms through Regulation?

The Committee has questioned the justification for introducing the 'significant new obligations' through delegated legislation rather than through primary regulation. The Committee comments that:

'despite the Regulations imposing obligations that have a significant effect on licensees that provide proxy advice there is no justification in the explanatory statement as to why it is appropriate for the relevant matters to be dealt with by delegated legislation as opposed to primary legislation'. 

The Committee has requested the Treasurer's 'advice as to why it is considered necessary and appropriate to use delegated legislation, rather than primary legislation, to introduce significant new obligations on financial services licensees that provide proxy advice, noting in particular that this approach appears to be inconsistent with the guidance provided in the Department of the Prime Minister and Cabinet's Legislation Handbook'.

Lack of clarity around review of the reforms 

The Committee is concerned that, 'as the Corporations Regulations are exempt from sunsetting...there is potential for the measures to remain in force indefinitely through delegated legislation.'  The Committee considers that if the measures are intended to be ongoing, the reforms would be 'more appropriately contained in primary legislation'.

The Committee is also concerned that 'it is unclear' from the explanatory statement, whether a 'specific review' of the operations of the provisions (to determine whether they remain necessary/appropriate) will occur.

The committee has requested the Treasurer's advice on: 

  • 'whether the Corporations Regulations 2001 can be amended to provide that the measures cease within three years after commencement'
  • 'whether there is any intention to conduct a review specific to the relevant provisions to determine if they remain necessary and appropriate, including whether it is appropriate to include the provisions in delegated legislation'

Civil and Criminal penalties

The Committee observes that the new requirements are 'underpinned' by significant civil and criminal penalties and raises concerns that though the Regulations themselves do not directly prescribe any penalty, they do 'modify the general obligations of financial services licensees under the Corporations Act, allowing the amendments to utilise existing criminal offences and civil penalties contained in the Corporations Act'. 

The Committee queries the absence of justification for why the penalties are appropriate to the particular offences or provisions.  

The Committee's view,  in light of the 'seriousness of the offences and quantum of penalties the Regulations would give effect to' is that (again) that it 'would be more appropriate for the amendments to be made by primary legislation'.

The Committee has asked the Treasurer to provide a response to the following questions.

  • explain 'the justification for the Regulations giving effect to significant offences and civil penalties, as opposed to these penalties being given effect to by primary legislation'
  • 'why the penalties are appropriate, and in particular why custodial penalties are appropriate, with reference to the Attorney-General's Department's Guide to Framing Commonwealth Offences'
  • 'whether the Attorney-General's Department was consulted in relation to the effective inclusion of custodial penalties in the Regulations, in accordance with Part 3.3 of the Guide to Framing Commonwealth Offences'.

Lack of clarity in the drafting

The Committee raises concerns about the clarity of the drafting of the new independence obligation in particular.  

Specifically, the Committee raises concerns that the term 'independent' and the term 'any other entity' are not defined either in the Corporations Act 2001 (Cth) or in the Regulations, giving rise to uncertainty for proxy advisers around how they would fulfil their obligations; uncertainty for regulators 'trying to enforce the provision' and 'possible uncertainty for other interested parties including entities that are the subject of proxy advice'.  

The Committee has asked the Treasurer to advise whether subregulation 7.6.03D(3) 'can be redrafted to provide greater clarity as to: the meaning of the term "independent" and the meaning of the term "any other entity", including clarification of the requisite test or threshold for determining which entities will fall within the concept of "any other entity"'.  

Response requested from the Treasurer 

The Committee has requested that the Treasurer provide responses to the questions above by 10 February 2022.  The rationale given for this request is as follows.   

'The committee's expectation is to receive a response in time for it to consider and report on the Regulations while they are still subject to disallowance.  If the committee has not concluded its consideration of an instrument before the expiry of the 15th sitting day after the instrument has been tabled in the Senate, the committee may give notice of a motion to disallow the instrument as a precautionary measure to allow additional time for the committee to consider information received.  Noting this, and to facilitate the committee's timely consideration of the matters above, the committee would appreciate your response by 10 February 2022'.

[Source:Senate Standing Committee for the Scrutiny of Delegated Legislation, Monitor 1 of 2022 - Committee correspondence 25/01/2022]

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https://www.minterellison.com/articles/committee-calls-on-treasurer-to-provide-answers-about-new-proxy-reforms

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