ASIC user-pays regime to commence 1 July 2017 - Financial Services

From 1 July 2017, ASIC's regulatory costs will be recovered from Australian companies and other "leviable entities" across all industry sectors regulated by the Australian Securities and Investments Commission (ASIC) under an industry funding model (Industry Funding Model). On 22 February 2017, the exposure draft legislation (and explanatory materials) (Proposed Legislation) to establish the framework for the Industry Funding Model was released for public submissions.

The Industry Funding Model was announced by the Federal Government on 20 April 2016, following the final report of the Government's Financial System Inquiry (Inquiry) on 7 December 2014 that both consumers and the industry have little understanding of the cost associated with facilitating ASIC's supervisory role and as a flow on effect, ASIC has limited accountability.

The Industry Funding Model has therefore been put forward with the intention of ensuring ASIC's funding be borne by those entities that have created a need for it in place of the taxpayers, establishing price signals to drive economic efficiencies with regard to the allocation of ASIC's resources, and improving transparency and accountability.

The Proposed Legislation comprises of:

ASIC Supervisory Cost Recovery Levy Bill 2017 (Levy Bill) ¹;
ASIC Supervisory Cost Recovery Levy (Collection) Bill 2017 (Collection Bill)²;
ASIC Supervisory Cost Recovery Levy (Consequential Amendments) Bill 2017;
ASIC Supervisory Cost Recovery Levy - Exposure Draft Explanatory Materials.

In this alert, Partners Michael Hansel, Robyn Ferguson, Senior Associate Katherine Hammond and Solicitor Christina Hooper explain how the Industry Funding Model will work, who it will affect, and the obligations and liabilities those affected can expect to have imposed on them from 1 July 2017.

In Summary

All entities that are regulated by ASIC will be required to pay an annual levy.
Entities will be required to lodge an annual return after the end of each financial year.
ASIC will calculate its regulatory costs for a year and the Government will retain control over the maximum amount of regulatory costs that may be recovered.
ASIC will group entities into different classes, sectors and sub-sectors, and will apportion the regulatory costs to entities according to the various categories.
The aggregate amount that ASIC recovers from the annual levies is not to exceed ASIC's regulatory costs for that year, and that there should not be cross-subsidisation in that regulatory costs that do not relate to a particular sector or subsector should not be recovered from that sector or subsector.
The Industry Funding Model will commence on 1 July 2017. Entities will be required to pay levies for the first time for the 2017/2018 financial year.
There will be penalties and potentially fatal consequences for entities that do not comply.

Summary of Industry Funding Model

The effect of the Proposed Legislation is that entities that are regulated by ASIC during a financial year (Leviable Entities) will be required to pay a levy to recover ASIC's regulatory costs. The levy will be payable by entities in the following financial year once ASIC has issued a notice setting out their liability to pay the levy.

The objective of the Industry Funding Model is that the total amount of levy paid by all entities should not exceed ASIC's total regulatory costs against all sub-sectors for a particular financial year. The regulations will provide methods and formulas for how ASIC's regulatory costs are to be apportioned across the various sectors and sub-sectors that it regulates.

Each Leviable Entity will be required to submit a return to ASIC containing information that will be used to calculate the levy. ASIC will then issue a legislative instrument setting out what its regulatory costs were in relation to a financial year, as well as matters that are required by the methods or formulas to apportion its regulatory costs across Leviable Entities.

After the levy amount has been determined for a financial year, ASIC will issue notices to entities setting out the levy amount and when it will be due and payable.

Who does it apply to?

The obligation to pay the ASIC levy will apply to a "Leviable Entity" which is a person who is a "Regulated Entity" at any time in the financial year and is not an exempt entity for that financial year.

A "Regulated Entity" is defined to include a number of entity types that are regulated under various Acts that ASIC administers, namely:

a company that is registered under the Corporations Act 2001;
a company that is a disclosing entity under section 111AC(1) of the Corporations Act 2001;
a financial services entity;
a credit services entity;
a market infrastructure entity;
an audit entity;
a liquidator entity;
a company-like entity; or
a person regulated by ASIC who is in a class of persons prescribed by the regulations.

Because some of the entity types that make up the definition of Regulated Entity are not legal persons, the liability is imposed on each member of such entity types which are treated as a person for the purposes of the Proposed Legislation, namely each:

partner in a partnership;
member in an association;
trustee that is part of a group of individual trustees that hold an RSE licence; and
trustee of a trust treated as a single 'notional entity' for the purposes of the Levy Bill.

What obligations will the Proposed Legislation impose on Leviable Entities?

Essentially the Proposed Legislation will:

impose an additional reporting obligation on Leviable Entities to lodge a return with ASIC in the approved form (Annual Return) in respect of a financial year by 31 October of the following financial year. The approved form may require the Annual Return to include information relating to the Leviable Entity, and information relating to one or more other Leviable Entities; and
require Leviable Entities to pay an annual levy.

When will the Industry Funding Model commence?

The Proposed Legislation is intended to commence on 1 July 2017, with the first year that ASIC will recover its regulatory costs being the 2017-2018 financial year. This means that Leviable Entities will be required to lodge an Annual Return by 31 October 2018 and can expect a levy notice from ASIC thereafter.

How much will the levy be?

The amounts payable each year will be set out through a combination of regulations (made by the Governor General) and legislative instruments (made by ASIC). The regulations will set out the methods or formulas that will be used to apportion ASIC's regulatory costs. ASIC's annual legislative instrument will set out certain information that will be required by the methods or formulas (such as ASIC's regulatory costs and aggregated sub-sector information contained in the returns).

The amount of levy payable by a Leviable Entity for a financial year is the amount worked out in accordance with the regulations.

The regulations may specify different rates for different classes, sectors or sub-sectors of Leviable Entities. The sectors or sub-sectors will be defined in the regulations. A Leviable Entity may fall within more than one sub-sector.

The formulas for calculating the levies must be consistent with the objectives that:

the total amount of levy payable by all Leviable Entities for a financial year must equal ASIC's regulatory costs for that financial year; and
the total amount of levy payable by all Leviable Entities in a particular class, sector or sub-sector in a financial year must equal the amount of ASIC's regulatory costs relation to that class, sector or subsector for that financial year.

The rationale for this is that the Government should not be able to recover more than ASIC's regulatory costs, and that there should not be cross-subsidisation of particular entities regulated by ASIC – regulatory costs that do not relate to a particular sector or subsector should not be recovered from that sector or subsector.

How much of ASIC's regulatory costs will be recovered?

ASIC will be required to calculate its regulatory costs for a financial year in an instrument made after the last day on which returns must be lodged with ASIC by Leviable Entities.

There is scope for the Government to retain control over what costs may be recovered from the industry by allowing for the regulations to prescribe amounts that ASIC may not include in the amount included in the legislative instrument.

For the purposes of calculating the levies, ASIC's regulatory costs are then defined to mean the lesser of:

the total amounts appropriated by the Parliament for the purposes of ASIC for the financial year; and
the amount determined by ASIC in the instrument for the financial year.

When must the levy be paid?

A levy will become due and payable for a financial year when ASIC issues a notice in relation to that financial year which will provide at least 30 days for payment. Consequently, it will depend on how long it takes ASIC to calculate the regulatory costs, issue the legislative instrument, and issue levy notices. At the earliest, the levy will be payable at the end of November after the financial year.

What happens if you don't comply?

Failure to pay the levy by the due date will attract a 20% late payment penalty.

If a person fails to give an Annual Return to ASIC, ASIC may issue a default notice prescribing a levy and the person will also be liable to a strict liability criminal offence.

Where a person has made a false or misleading statement to ASIC in an Annual Return which results in them paying a lesser amount, they will be liable to a shortfall penalty of double the shortfall.

Where a levy, shortfall penalty or late payment penalty remains unpaid for 12 months, a range of administrative actions may be taken against the person, including deregistration and licence suspension or cancellation.

Will ASIC be accountable?

ASIC will be required to publish information on its website in relation to its regulatory costs for the previous financial year as soon as practicable after 31 October each year (from 31 October 2018), including:

ASIC's total regulatory costs in relation to Leviable Entities;
how ASIC has apportioned those costs across each sector and sub-sector;
in relation to each sector, how ASIC has apportioned its costs by reference to the types of activities undertaken, and the different kinds of expenses incurred by ASIC in the financial year; and
other information that may be required by the regulations.

This is intended to increase the transparency of ASIC's costs to its regulated population.

Abolition of Market Supervision Cost Recovery Regime

Since 1 August 2010, ASIC has had responsibility for market supervision. To recover the costs of the performance of its market supervision functions, since 1 January 2012, ASIC has imposed fees on ASX Limited and Chi-X Australia Pty Limited cash equity market participants under a 'market supervisory cost recovery regime' developed by Treasury and ASIC in consultation with industry. The introduction of the Industry Funding Model will render this existing market supervision cost recovery regime unnecessary.

Public consultation

The public may make submissions on the Proposed Legislation until 10 March 2017.

Additional public consultation will be held on the regulations necessary to support the model prior to their consideration by the Executive Council.

Footnotes

¹ The Levy Bill imposes a levy on persons regulated by ASIC to recover its regulatory costs.

² The Collection Bill empowers ASIC to collect the levy and requires entities to submit returns annually so that ASIC is able to calculate the levy.

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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Australia: ASIC user-pays regime to commence 1 July 2017