Date introduced: 27 March 2024
House: House of Representatives
Portfolio: Treasury
Commencement: As set out in the body of this Bills Digest.
Purpose of the Bill
The Treasury Laws Amendment (Financial Market Infrastructure and Other Measures) Bill 2024 (the Bill) gives legislative effect to two ‘important reforms’:[1]
- Schedules 1, 2, 3 and 5 of the Bill introduce measures to strengthen regulatory arrangements for Australia’s financial market infrastructure [2]
- Schedule 4 of the Bill introduces a mandatory regime of climate-related financial disclosure for large businesses and financial institutions.[3]
The Bill makes changes primarily to the Corporations Act 2001:
- Schedule 1 introduces the financial market infrastructure crisis management and resolution regime
- Schedule 2 enhances the licencing, supervisory and enforcement powers of ASIC and the RBA in relation to financial markets
- Schedule 3 makes changes in relation to the roles and responsibilities between the Minister, ASIC and the RBA
- Schedule 4 implements the climate-related financial reporting regime
- Schedule 5 makes various minor and technical amendments.[4]
History of the Bill and its consultation processes
Prior to introducing the Bill in Parliament on 27 March 2024, the Government and financial regulators undertook multiple consultation processes to gather feedback from stakeholders on the proposed reforms. The consultation process resulted in two separate Exposure Draft Bills.
Consultation processes for mandatory climate disclosure include:
Consultation processes for FMI regulatory reforms include:
The Bill that is subsequently introduced in Parliament combines these two Exposure Drafts, effectively making it omnibus legislation.[5]
There are some differences between the Exposure Drafts and the Bill, particularly in relation to the climate financial reporting regime outlined in Schedule 4. The Treasury has indicated it plans to publish a table detailing the outcomes of Exposure Draft Consultation.[6]
As the two reform initiatives are independent of each other, the relevant background and key issues of the two initiatives are set out separately in this Bills Digest.
Committee consideration
Senate Economics Legislation Committee
On 3 May 2024, the Senate Economics Legislation Committee (chaired by Labor Senator Jess Walsh) published its report on the Bill and recommended the Bill be passed.[7]
Coalition Senators (Senators Andrew Bragg and Dean Smith) made a dissenting report and raised concerns about several aspects of the Bill. [8] They made 7 recommendations, 6 of which concerned the proposed climate financial disclosure regime.
Senator Nick McKim of the Australian Greens and Senator David Pocock (Independent Senator for the Australian Capital Territory) each made additional comments about the Bill.
The Australian Greens asserted that a mandatory climate disclosure regime is ‘long overdue’, but argued that several aspects of the proposed regime must be amended to ensure a long-term framework that disincentivises ‘greenwashing’.[9]
Independent Senator David Pocock made similar remarks that ‘the considerable positive changes in the Bill are undermined by the modified liability regime in Schedule 4’.[10]
Details of the Coalition Senators’ dissenting report and the Australian Greens’ additional comments are discussed in the ‘Policy position of non-government parties’ section of this Digest.
Senate Selection of Bills Committee
At its meeting of 27 March 2024, the Senate Selection of Bills Committee noted that it had deferred consideration of the Bill until its next meeting.[11]
Senate Standing Committee for the Scrutiny of Bills
At the time of writing, the Bill had not been considered by the Scrutiny of Bills Committee.[12]
Statement of Compatibility with Human Rights
As required under Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 (Cth), the Government has assessed the Bill’s compatibility with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of that Act. The Government considers that the Bill is compatible with human rights.[13]
Parliamentary Joint Committee on Human Rights
The Parliamentary Joint Committee on Human Rights had no comment on the Bill.[14]
Schedule 4 – Mandatory Climate-related Financial Disclosure
Background
What is climate-related financial disclosure and why does it matter?
Climate-related financial disclosure refers to reporting about how climate change could affect a company’s financial performance, operations, and sustainability.
Climate change could affect a company’s financial performance in many ways. For example, more frequent and severe weather events caused by climate change could damage a company’s assets and disrupt its operations. Assets or investments located in areas prone to natural disasters may also suffer devaluation.[15]
In response to these financial risks, regulators expect companies to implement robust risk management strategies and plans that address both the risks and opportunities presented by climate change.[16]
As public awareness of climate change issues grows, there has been a noticeable rise in shareholder activism, with investors increasingly advocating for companies to disclose how they are affected by and managing climate risks and opportunities.[17]
Furthermore, many investors ‘believe existing corporate reporting contains at least some level of unsupported sustainability claims’ (a practice known as greenwashing).[18] As a result, investors are demanding better climate-related financial disclosures so they can make more informed decisions about where to invest.[19]
A variety of climate disclosure guidelines
A variety of climate disclosure guidelines and standards currently exist in Australia and around the globe, each equipped with its own distinct reporting requirements and styles. These standards include Task Force on Climate-related Financial Disclosures (TCFD), Sustainability Accounting Standards Board standards, Global Reporting Initiative standards, and Sustainable Development Goals.[20]
Australian financial regulators have issued guidelines for companies to voluntarily disclose their climate change related financial risks in alignment with the TCFD framework.[21] Currently, many large corporations listed on the Australian Securities Exchange (ASX) prepare their sustainability and climate change reports in accordance with the TCFD framework.[22]
However, the Australian Government notes there are problems with existing climate financial disclosures by companies:
… existing climate risk disclosures are often inconsistent or contain insufficient information to support decision-making. Investors also note the lack of standardisation makes disclosures difficult to compare, which impacts their decisions. …
The use of multiple frameworks, some voluntary and some mandatory, alongside different reporting formats without any benchmark for quality, means that users face a harder task in analysing sustainability information. This ultimately leads to increased costs for users and introduces inefficiencies into processes and eventually the market – leading to misallocation of capital. …
Poor quality disclosures also increase the risk of greenwashing.[23] [emphasis added]
The Government considers Australian companies could become less competitive in global capital markets if our climate disclosure regime does not align with international best practice.[24]
Global baseline for climate financial disclosures
In November 2021, the establishment of the International Sustainability Standards Board (ISSB) was announced at the United Nations Climate Change Conference in Glasgow (COP 26).[25] The ISSB was created in response to a growing demand for more consistent and comparable climate-related financial disclosures.[26] This initiative for a global baseline for climate disclosures is supported by G20 countries, which include Australia.[27]
Established as an independent standard-setting body under the International Financial Reporting Standards Foundation, the ISSB aims to develop sustainability reporting standards that will establish a comprehensive global baseline of climate-related financial disclosures that are ‘focused on the needs of investors and the financial markets’.[28]
In June 2023, the ISSB issued its inaugural standards:
The ISSB asserts that the 2 standards create a common language for disclosing the effect of climate-related risks and opportunities.[29] The ISSB builds on the foundations of the TCFD, and it is arguable that the ISSB standards are intended to be more prescriptive than the TCFD.[30]
Australian Government’s commitment to introduce internationally aligned sustainability reporting standards
In a policy position statement published in December 2023, the Australian Government endorsed the adoption of the ISSB standards in Australia, with modifications limited to ensuring the standards are well-suited for Australia’s specific needs.[31] This follows the Government’s commitment in its 2022–23 October Budget to introduce internationally-aligned climate disclosure requirements.[32]
The Australian Accounting Standards Board (AASB) is responsible for the drafting of the Australian sustainability reporting standards that are expected to align as closely as possible with the relevant standards issued by the ISSB.[33] In other words, if enacted the Bill empowers the AASB to issue the final Australian Sustainability Reporting Standards that will specify the details of climate disclosure obligations for Australian companies.[34]
In October 2023, the AASB released its draft standard SR1 Australian Sustainability Reporting Standards – Disclosure of Climate-related Financial Information. The AASB and the Treasury anticipate that the reporting standards will be finalised in the third quarter of 2024.[35]
The Government acknowledges that there will likely be some implementation costs in imposing mandatory climate disclosure obligations on companies.[36] However, it also argues the benefit of having internationally aligned standards is that the standards provide a baseline for information comparison.[37]
Furthermore, several other countries are developing their own mandatory climate disclosure requirements in alignment with ISSB standards.[38] As such, the Australian Government claims the implementation of internationally aligned standards are ‘necessary to sustain Australia’s reputation as a destination for the international capital that will be inevitably needed in the transition to net zero’.[39]
Key provisions and issues
Policy intention of the mandatory climate disclosure regime
Schedule 4 of the Bill intends to provide investors with greater transparency of a company or entity’s climate-related plans and strategies.[40] Specifically, the Government believes that greater transparency can be achieved by improving the quality and comparability of disclosures of material climate-related financial risks and opportunities within the financial reporting framework.[41] Improved climate-related financial disclosures will also support regulators to assess and manage systemic risks to the financial system.[42]
Overview of Schedule 4
To achieve these policy aims, Schedule 4 requires certain entities to make climate-related financial disclosures in accordance with the relevant AASB standards (also known as Australian Sustainability Reporting Standards or ASRS). The new mandatory climate reporting regime leverages the existing financial reporting regime set out under Chapter 2M of the Corporations Act 2001.[43] Key aspects of Schedule 4 include:
- Mandatory climate disclosures to be phased in over time: Entities under the Corporations Act that meet certain minimum size thresholds and/or have emissions reporting obligations under the National Greenhouse and Energy Reporting (NGER) scheme will be required to disclose their climate-related risks and opportunities.[44] In other words, the proposed climate disclosure obligations are intended to apply to large businesses and financial institutions only, and will be phased in over time. However, there could be some flow-on effects for smaller businesses.
- Sustainability report: Companies will need to make their climate financial disclosures in a new type of report called a ‘sustainability report’.[45] The sustainability report will form part of an entity’s annual reporting package that will be comprised of financial report, directors’ report, auditor’s report, and sustainability report.[46]
- Auditing and assurance requirements: Companies need to obtain audit and assurance for their annual sustainability report. In other words, the auditor of a sustainability report has the same obligations as the auditor of an annual financial report.[47]
- Alignment with global standards: Companies will be required to disclose their climate-related financial risks and opportunities in line with AASB standards. The AASB standards are expected to align as closely as possible with the relevant standards issued by the ISSB.[48]
Figure 1: Overview of affected parties, timelines, and mechanisms of the proposed climate-related financial disclosures
| Who |
What |
When |
How |
- Large entities required to report under Chapter 2M of the Corporations Act.
- Entities required to report under the NGER Act.
- Asset owners with over $5 billion in assets under management.
|
- Climate-related disclosures prepared in line with the Australian Sustainability Reporting Standards (to be released by the AASB).
- Mandatory reporting of Scope 1, 2 and 3 greenhouse gas emissions.
|
- Phased-in approach for Groups 1, 2 and 3 entities.
- Group 1 entities required to commence climate disclosures from 1 January 2025.
- Limited assurance requirements from Year 1, full reasonable assurance by 2030.
|
- Amendments to the Corporations Act.
|
Source: Roohi Ghelani and Julian Soo, ‘A Closer Look at the Exposure Draft Legislation on Climate-related Financial Disclosures in Australia’, (Anthesis Group), amended by the author of this Bills Digest to reflect the differences between the Exposure Draft Bill and the Bill introduced into Parliament.
How many businesses will be affected by the legislation?
The Treasury estimates at least 1,800 Australian businesses and financial institutions will be mandated to disclose their climate-related risks and opportunities under the proposed climate disclosure regime.[49]
Affected businesses are categorised into three groups, each with different thresholds for reporting. The specific thresholds for these groups are based on criteria such as consolidated revenue, consolidated gross assets, and the number of employees (see Figure 2).
Climate disclosure obligations for these 3 groups will be gradually phased in, starting with the largest entities and progressively move on to smaller large businesses.[50]
Figure 2: Thresholds for Group 1, 2 and 3 entities
Source: Treasury, ‘Mandatory climate-related financial disclosures: policy position statement’, 2, amended by the author of this Bills Digest to reflect the differences between the Exposure Draft Bill and the Bill introduced in Parliament. These changes include first annual reporting period for Group 1 entities.
Based on Treasury analysis on 2021 data:[51]
- Group 1 is expected to capture at least 729 entities. The thresholds for inclusion in Group 1 are broadly equivalent to the characteristics of the 200th company in the ASX200.[52] In other words, the expected size and revenue of companies in Group 1 would be comparable to those large companies listed on the Australian Securities Exchange (ASX). These large businesses may already voluntarily disclose their climate risks in alignment with the TCFD framework. Furthermore, these large businesses are likely to have the resources and expertise to meet their climate disclosure obligations. Accordingly, Group 1 entities commence reporting from 1 January 2025.
- Group 2 is anticipated to include at least 755 entities. The thresholds for inclusion in Group 2 are broadly equivalent to the characteristics of the 300th company in the ASX300.[53] The Government has clarified that asset owners, including superannuation funds and investment schemes, are not classified as Group 1 entities even if they meet Group 1 thresholds. Instead, asset owners are designated as Group 2 entities if their assets under management exceed $5 billion. Group 2 entities commence reporting from 1 July 2026.
- Group 3 is projected to encompass at least 278 entities. Prior to introducing the Bill, the Government sought feedback on three potential options (known as options 1, 1a, and 1b) for implementing the proposed mandatory climate disclosure framework. At the time of writing, the Bill reflects option 1b.[54] Under this option, Group 3 has a narrower coverage because the Bill contains a materiality exemption for Group 3 entities. In other words, entities in Group 3 are exempt from detailed climate-related financial disclosures if they can demonstrate that they have no material climate-related risks or opportunities.[55] Group 3 entities that do have material climate risks commence reporting from 1 July 2027.
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Explainer: What is the National Greenhouse and Energy Reporting (NGER) scheme?
The NGER scheme (established under the National Greenhouse and Energy Reporting Act 2007 (NGER Act)) requires certain companies to report annually on their greenhouse gas emissions, energy production and energy consumption. Companies that are already reporting under the NGER scheme (known as ‘NGER entities’) are deemed as Group 1 or Group 2 entities under the proposed climate-related financial disclosure framework (see Figure 2).
The NGER scheme mandates NGER entities to report their scope 1 and scope 2 greenhouse gas emissions. Scope 3 emissions are not mandatory to report under the NGER Act, but many companies in Australia choose to report on their scope 3 emissions voluntarily.[56]
Scope 1 emissions refer to emissions that a company directly creates. Scope 2 emissions refer to emissions from a power source (for example, electricity) that the company buys and uses. Scope 3 emissions include all other indirect emissions that happen throughout the company’s supply chain.[57]
Under the proposed climate disclosure regime, all reporting entities (including NGER entities) are required to disclose their scope 1, 2 and 3 emissions.[58] However, disclosure of scope 3 emissions would only be required from their second reporting year onwards.[59]
The definitions of scopes 1 and 2 emissions are currently set out in the NGER Act. The Bill proposes to align the definition of scope 1, 2 and 3 emissions with the definition given in the draft AASB sustainability standards.[60]
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Which entities will not be required to report under the mandatory regime?
Under the proposed climate disclosure regime, entities that are already exempt from lodging a financial report under Chapter 2M of the Corporations Act will not be obligated to prepare a sustainability report.[61] These exempt entities include:
- small and medium-sized businesses or asset owners that do not meet the thresholds outlined in Figure 2 (unless they are a NGER reporting entity)
- an entity has been provided with relief or is exempt from financial reporting by way of an ASIC class order or individual entity relief
- charity and not-for-profit organisations.[62]
What kind of information is required to be disclosed?
The Bill proposes that companies must make their climate-related financial disclosure in an annual ‘sustainability report’.[63] The annual sustainability report must include:
- a climate statement for the year, including any notes made in relation to the statement
- a directors’ declaration that the statements comply with the Bill.[64]
The Minister may make a legislative instrument to require additional statements and notes relating to sustainability-related financial matters to be included as part of an entity’s annual sustainability report.[65]
An entity’s sustainability report is subject to mandatory auditing and assurance processes.[66]
Climate statement
An entity’s climate statements must be prepared in line with the relevant sustainability standards issued by the AASB (in other words, ASRS). Whilst the ASRS is yet to be finalised, it is expected that an entity’s climate statements must disclose:
- material climate risks and opportunities faced by the entity (if any);
- the entity’s governance process, strategy, and risk management plan about how to manage climate-related risks and opportunities
- climate metrics and targets, including the entity’s Scope 1, 2 and 3 greenhouse gas emissions.[67]
Directors’ declaration
An entity’s annual sustainability report must include a directors’ declaration that climate statements comply with the sustainability standards specified in the Bill.[68]
However, the Bill introduces transitional provision for directors’ declarations for the first three years. In other words, for the first three years of the mandatory reporting regime, directors who are required to provide a declaration will only need to declare that their reporting entity has taken reasonable steps to ensure the substantive provisions of the sustainability report are in accordance with the Bill.[69]
The transitional period may be intended to provide directors enough time to build the necessary expertise needed for accurate climate-related financial disclosures.
Auditing and assurance requirements
An entity’s sustainability report is subject to mandatory auditing and assurance processes.[70] Similar to the phased-in approach of mandatory climate disclosures, the sustainability report’s assurance requirements will also be phased in.
According to the Explanatory Memorandum, ‘Initially, the sustainability report will only be required to be reviewed or audited to the extent required by the audit standards made by the Auditing and Assurance Standards Board (AUASB)’.[71]
Over time, these auditing standards are expected to develop further, which will enhance the scope of assurance required for climate disclosures in the sustainability report.
On 20 March 2024, the AUASB released a consultation paper to set out a pathway to phase in additional assurance requirements, such that by no later than 1 July 2030 reasonable assurance will be required for all climate disclosures.[72]
Modified liability for companies making climate-related disclosures
Three-year protection for sustainability reports
Climate-related financial disclosures will be subject to the existing liability framework embedded in the Corporations Act 2001 and the Australian Securities and Investments Commission Act 2001 . These laws address matters such as directors’ duties, misleading and deceptive conduct, and general disclosure obligations.[73]
Currently, if a company makes a misleading climate-related statement about future matters without reasonable grounds, then it could be in breach of corporation laws.[74] For example, in 2021 environmental advocacy groups sued Santos Ltd (an energy company), alleging that Santos Ltd breached corporation laws and made false claims about having a ‘clear and credible’ plan to achieve net zero emissions by 2040.[75]
The Bill proposes a temporary modification in liability framework for the first three years of the mandatory climate disclosure regime.[76] This approach is known as ‘modified liability’ approach, and it provides a transitional period during which entities can adjust to the new reporting standards without the ‘threat’ of civil actions. Specifically, the modified liability approach provides reporting entities protection or immunity from civil actions for the first three years of sustainability reporting (other than actions by ASIC).[77]
According to the Explanatory Memorandum, no legal action may be brought against a reporting entity in relation to a ‘protected statement’. Only ASIC will be able to take action for misleading and deceptive conduct in relation to climate-related disclosures during the transitional period.[78] Notably, the modified liability approach does not prevent criminal proceedings brought by ASIC.[79]
For the purpose of the modified liability approach, a protected statement is:
- a statement made within a sustainability report within the first three years of the disclosure regime
- an auditor’s report of audits or reviews of sustainability reports about
- Scope 3 greenhouse gas emissions
- scenario analysis made in those sustainability reports
- climate-related transition plans or targets.[80]
The Government argues:
The policy intention [of modified liability] is to ensure that during the transitional period, ASIC can undertake a role that promotes education about compliance with the new reporting regime and deter poor behaviours and reporting practices that are contrary to the objectives of the new reporting regime.[81]
Several environmental advocacy groups have argued the three-year immunity period is ‘unwise’.[82] The groups advocate for the removal of modified liability (see the ‘Position of major interest groups’ section of this Digest).
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Explainer: If I am a reporting entity, how long would I be protected under the modified liability provisions?
The length of protection varies based on whether a reporting entity is classified as a Group 1, Group 2, or Group 3 entity. For example, if the Bill were enacted tomorrow, a Group 1 entity would need to prepare its annual financial report (including sustainability report) for the 2025 financial year (from 1 July 2024 to 30 June 2025) in compliance with the climate disclosure regime.[83] The entity’s 2025 financial year sustainability report would be safeguarded by the modified liability provisions, which would also extend protection to its 2026 and 2027 financial year sustainability reports.
Regardless of the Bill’s passage date, Group 1 entities will receive the longest protection period under the modified liability approach, Group 2 entities will have a shorter period, and Group 3 entities will receive the shortest immunity period.[84]
According to the Treasury’s December 2022 consultation paper, the rationale is:
Larger entities have more resources to adequately respond to new requirements, while smaller firms have time to benefit from the institutionalisation of reporting in the market prior to commencing their own reporting.[85] [emphasis added]
Put simply, Group 2 and Group 3 entities can observe and learn from Group 1 entities. The Australian Greens have criticised this approach and argued Group 3 entities should be given longer protection (see the ‘Policy position of non-government parties’ section).
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One-year protection for forward-looking statements
One key difference between the Exposure Draft legislation and the Bill introduced in Parliament is that the latter extends modified liability protection for forward-looking statements.[86]
As part of their financial reporting, some companies make forward-looking statements, which could include projections about the company’s financial performance, how much the company’s assets could devalue due to climate-related risks, how the company plans to achieve net zero emissions, et cetera.
If an entity makes a forward-looking statement for the purpose of complying with the relevant sustainability standards and auditing standards, then the statement is protected from civil actions for 12 months.
The 12-month protection for forward-looking statements overlaps with the 3-year protection noted above.[87]
The Australian Institute of Company Directors speculates the rationale for the 12-month protection for forward-looking statements is:
Without the benefit of decades of established principles and conventions, there is a heightened level of uncertainty relating to climate disclosures which in relative terms, is still in its infancy. In particular, IFRS S2 calls for highly company-specific disclosures which, under the Treasury's current proposals, are currently either not assured, or only subject to limited assurance.
Further, a significant number of IFRS S2 disclosures will require prediction or estimation over long (5 to 10 year+) time horizons and be subject to constantly changing assumptions due to changes in decarbonisation trajectories, technological development and changing government regulation. For instance, the future demand and projected revenue from a product may be heavily subject to technological development.[88]
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Explainer: Why does the Bill include the modified liability protection for large corporations?
According to Treasury officials, the modified liability is a compromise between different stakeholders. This view was expressed in an exchange between Senator Dean Smith and a Treasury official in a Senate public hearing about the Bill:
Senator Dean Smith: Ms McCallum [Treasury official], in your earlier evidence, you talked about the balance between stakeholders needing to be traded off between them. Can you explain in a little bit more detail for the committee what trade-offs took place between which stakeholders or which industry or sectorial groups?
Ms McCallum: I think the biggest trade-offs that I would describe are between the needs of investors and users of the reports and the needs of the people who are going to have to do the reporting. We do understand that the people who are using the reporting information ultimately want more and more detailed information sooner. They want it to be more comprehensive, and they want to have more extensive rights to be able to litigate. Meanwhile, those who are under the obligation to report are likely to be seeking to have those obligations be less onerous and come in later and to be protected from mistakes they might make as they go along.
I think those two things are often mutually exclusive, and so what we’ve tried to do is find a middle ground between that need for expedience—things being implemented very quickly and being very comprehensive—and entities being immediately fully accountable and liable, and the ability for reporters to adjust and commence over time.[89] [emphasis added]
Put simply, investors and environmental advocacy groups want ‘extensive rights’ to bring civil litigations against an entity if it makes a misleading sustainability report. On the other hand, large corporations want more protection from litigation. The modified liability approach proposed in the Bill is a ‘middle ground’ between the demands of different major interest groups.
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Position of major interest groups
Over 120 stakeholders submitted written responses to the Government in relation to the Exposure Draft Bill for Schedule 4. Additionally, 26 stakeholders presented submissions to Parliament regarding the Bill. Numerous stakeholders also indicated their policy position in a Senate public hearing about the Bill.
For conciseness, this Bills Digest highlights a few major arguments from stakeholders, rather than examining every submission.
Environmental advocacy groups
Several environmental advocacy groups – including the Australian Conservation Foundation, Environmental Defenders Office, Climate Integrity, and Environmental Justice Australia – are broadly supportive of the Bill and ‘welcome the introduction of mandatory climate reporting requirements for large businesses and financial institutions.’[90]
However, these environmental advocacy groups oppose specific provisions of the Bill because they believe the provisions either delay or undermine Australia’s carbon emission reduction goals. For instance, Environmental Justice Australia (EJA) argues:
EJA is concerned that the proposed modified liability regime, by removing the right of third parties (including investors) to hold entities accountable for misleading and deceptive claims made in climate disclosures, directly undermines the benefits of transparency that mandatory climate reporting seeks to achieve. Without a corresponding right for third parties to commence legal proceedings against entities for climate-related financial disclosures that infringe the legislative requirements, the Bill lacks a critical enforcement mechanism to ensure accountability. EJA submits that this creates a heightened risk that these provisions of the Bill may actually facilitate greenwashing claims that distract from and delay credible climate action for a further three years, at this critical time.[91] [emphasis added]
As such, the EJA and several other environmental groups have recommended the removal of modified liability provisions from the Bill.[92]
Alternatively, Equity Generation Lawyers (a law firm that specialises in climate laws) proposes reducing the scope of protection or immunity provided by the modified liability provisions:
The immunity from private litigation should be limited to civil proceedings for misleading or deceptive conduct that seek loss or damage. …
Extending the immunity to more serious misconduct such as negligent misstatement, breach of statutory duty, and breach of fiduciary duties provides an unreasonable safe harbour from private litigation that does not fulfil the goals of promoting investor confidence or improving Australia’s reputation.[93]
In addition to concerns about the modified liability approach, the Environmental Defenders Office (EDO) also opposes the delay of the reporting commencement date for Group 1 entities.
In the Exposure Draft Bill, Group 1 entities would commence mandatory climate reporting from 1 July 2024. However, the Bill as introduced in Parliament delays the commencement date for Group 1 entities to 1 January 2025 (or the first financial year that commences after that date).[94] The Treasury argues the delay is to ensure entities have sufficient lead time and the backstop is designed to avoid doubt around commencement arrangements should legislation not pass this year.[95]
The EDO criticises the delay:
The EDO opposes the proposed delay of the commencement date for Group 1 entities. Any delay in the commencement date further compounds the material climate-related risks to the financial system. Further, any delay will ensure that Australia falls further behind other comparable jurisdictions which have already implemented equivalent reporting requirements.
… a significant proportion of Australia’s largest entities have already adopted the practice of making voluntary disclosures against the TCFD framework and are familiar with the GHG Protocol which inform the Bill. Given the familiarity and experience with the disclosure requirements, there is no reason to delay the commencement of the Bill.[96] [emphasis original]
Business groups
Several business groups and their peak bodies have expressed concern that the mandatory climate disclosure regime could create ‘excessive regulatory burden’ for Australian businesses.[97] For example, Housing Industry Association (HIA) claims:
The Climate-related Financial Disclosure legislation requires a separate Sustainability Report to be prepared, in addition to financial statements.
This will greatly increase the administrative burden on businesses without improving the quality of the information that is reported. HIA is of the view submissions [sic] proposed reporting should be able to be performed using a simple, consistent approach to disclosure, to reduce costs and increase certainty for business.[98] [emphasis added]
This sentiment is shared by the Australian Chamber of Commerce and Industry (ACCI) and the National Farmers’ Federation. The ACCI argues:
… there are elements of the climate-related financial disclosure legislation that create a heavy administrative burden, are not fully developed and represent substantial risk to business.
There are many important elements such as the AASB Sustainability Standards, reporting of Scope 3 emissions and scenario analysis, auditing and assurance requirements, as well as protections for businesses from vexatious litigation, that are only partially developed or have not been fully considered. These elements of the legislation represent a considerable risk for entities require[d] to make climate-related financial disclosure.[99]
Nexia Australia, a business advisory firm, provides an estimation of the compliance costs for Group 3 entities (see Figure 3) and argues:
We consider that these costs would represent an excessive regulatory burden on the majority of large proprietary companies and would outweigh any perceived benefits to the Australian economy.[100]
Figure 3: estimation of the compliance costs for Group 3 entities
Source: Nexia Australia, Submission, 3.
In the Explanatory Memorandum, the Government acknowledges that Schedule 4 is estimated to increase regulatory costs by $1.0 to $1.3 million per year per entity, averaged over 10 years.[101]
Academics
Academics from several universities – including Queensland University of Technology and Swinburne University of Technology – have expressed broad support for the mandatory climate disclosure regime. [102]
However, Professor Martina Linnenluecke from the University of Technology Sydney is pessimistic about the potential effect of the mandatory climate disclosure regime in driving corporate changes because she considers that the Bill is merely ‘window dressing’:
These laws are meant to increase transparency about how exposed companies are to risks from climate change, and will require companies to look into and share what impact their activities have on the environment. This, the government hopes, will accelerate change in the corporate sector.
But will it help lower emissions? I don’t think so. We don’t have a carbon tax, which means many companies have no financial incentive to actually lower their emissions. …
By themselves, climate disclosures will not trigger the change we need.
… Critics have pointed out that reporting and disclosure alone will not lead to a shift away from carbon-intensive business operations. Disclosures give the appearance of action rather than real action. If there are no stronger policies accompanying, disclosures act as window dressing for global financial markets.[103] [emphasis added]
Policy position of non-government parties/independents
Coalition
As noted, the Senate Economics Legislation Committee (chaired by Labor Senator Jess Walsh) recommended the Bill be passed.[104] Coalition Senators Andrew Bragg and Dean Smith issued a dissenting report and raised concerns about several aspects of Schedule 4.
Short timeframe to consider the Bill
In its submission to the Committee, the Law Council of Australia raised concerns about the limited time given to review the Bill:
Significant concern has been expressed from all corners of the legal profession about the extraordinarily short timeframe for this inquiry. Regrettably, the inquiry period has overlapped with the Easter public holiday period, and the due date for submissions was not published by the Committee on its website until a week prior to the deadline. Compressed inquiry timeframes undermine the democratic parliamentary process for the proper scrutiny of bills.[105] [emphasis added]
The introduction of mandatory climate disclosure has been described by ASIC chairperson Joe Longo as the ‘biggest change to company reporting in a generation’.[106] The Coalition Senators argued that the Senate Economics Legislation Committee had only a week to report on this significant change to Australia’s corporate law.[107] Therefore, they recommended:
The Senate should extend the committee’s consideration of this legislation, and additional hearings be scheduled to hear from a diverse range of witnesses, including small business representatives, to contemplate the impacts on supply chains, the regulatory burden, access to finance, and competition.[108]
Group 3 entities
The Coalition Senators expressed concerns that ‘the Bill places a disproportionate compliance burden on Group 3 entities, the vast majority of whom do not have any material impact on the climate’.[109]
Under the proposed regime, entities in Group 3 are exempt from climate-related financial disclosures if they can demonstrate that they have no material climate-related risks or opportunities.[110]
The Coalition Senators argued entities can only assess materiality after conducting an audit, which means ‘the vast majority of Group 3 businesses will be required to undertake a costly audit and seek external assurances, all to find that they have nothing to report.’[111] The Senators also asserted:
Group 3 entities are small and medium sized Australian businesses, usually closely-held by family groups with few or no external stakeholders. Critically, these businesses very rarely receive foreign capital.[112]
Consequently, the Senators recommended:
That Group 3 entities be removed entirely from the regime. Alternatively, that the threshold for Group 3 entities be increased to $100 million in gross revenue or $50 million in gross assets. …
In the event that Group 3 entities remain covered by the regime, those entities should be subject to simplified climate reporting standards, similar to the simplified financial accounting standards that apply to Tier 2 reporting entities. Critically, the requirement of an audit of a statement of no material climate risks or opportunities should be removed.[113]
Ministerial direction
Under the proposed disclosure regime, the Minister may make a legislative instrument to require additional statements and notes relating to sustainability-related financial matters to be included as part of an entity’s annual sustainability report.[114]
In their Dissenting Report, the Coalition Senators expressed concerns that this gives the Minister:
… broad, unfettered discretion to require disclosure of “financial matters concerning environmental sustainability” in an entity’s sustainability report through legislative instrument.[115] [emphasis added]
As such, the Senators recommended:
That the Minister’s proposed discretion in sections 296A(4)-(5) and 296(C) to require disclosure of “financial matters concerning environmental sustainability” be removed, or subject to explicit requirements of industry consultation.[116]
Modified liability
Coalition Senators acknowledged that the modified liability approach gives group 1 entities three-year protection from litigation concerning scope 3 disclosures, scenario analysis and transition plans. However, the Senators said they remain concerned that more should be done to prevent undue legal risk for companies.
The Senators noted:
The United States has taken a far more conservative approach. Its modified liability is not time-bound, and it explicitly covers disclosures regarding scenario analysis, transition planning, internal carbon pricing, and targets and goals disclosures. US businesses also have the benefit of existing safe harbour provisions for forward-looking statements, making litigation risk far less than for Australian firms.[117]
The Coalition Senators argued that the protection scope of Australia’s modified liability should be expanded, and they recommended:
That modified liability protections be extended to statements replicating information in a Sustainability Report or Audit Report in investor briefings, website statements, public addresses, or other like documents, and that further consideration be given to the appropriateness of compliance remaining with the regulator for an extended period.[118]
Assurance requirements
Coalition Senators noted Schedule 4 inserts proposed section 307AA to the Corporations Act, which will require a reasonable level of assurance of all climate disclosures for corporate reporting periods from 1 July 2030. The Senators recommended:
That the mandatory reasonable level assurance requirements of section 307AA be removed and an assessment be done after four years to consider what is possible and important to assure by early 2030.[119]
Australian Greens
Senator Nick McKim, of the Australian Greens, made additional comments about the Bill. The Australian Greens asserted that the proposed climate disclosure regime is ‘long overdue’, but also argued that several aspects of the disclosure regime must be amended to ensure a long-term framework that disincentivises greenwashing.[120]
The Greens said the modified liability is an ‘overreach’ to achieve the policy objectives of transitional arrangements:
The Bill is providing entities with a three year immunity from civil actions over matters that relate to a company’s scope 3 emissions reporting, future scenario planning or transition plans. …
While these three areas are novel for companies to report on, and by their nature, inherently involve some uncertainty when first commencing, the modified liability is an overreach in both scope and duration in order to achieve the policy objectives of transitional arrangements.[121]
Furthermore, the Greens said Group 1 entities are typically the best prepared entities to comply with the proposed mandatory disclosure regime. However, Group 1 entities will receive the longest immunity period under modified liability. In contrast, Group 3 entities, which are typically the least equipped, will be granted the shortest immunity period.[122]
The Greens recommended:
The modified liability should be spread out amongst the three groups to run for one, or at most two years from entry of that group so as not disproportionately benefit the biggest companies at the expense of smaller ones. ASIC should be given additional resources to prepare any necessary legal proceedings during this modified liability period.[123]
As noted, some environmental advocacy groups argued that the modified liability provisions should be completely removed.[124] The Australian Greens do not advocate for the removal of modified liability. Instead, the Greens said the compromise proposal submitted by Equity Generation Lawyers to restrict the modified liability immunity to misleading and deceptive conduct is a sensible proposal.[125] As such, the Greens recommended:
The modified liability provisions be reduced so that they only cover misleading and deceptive conduct seeking loss or damage.[126]
Financial implications
The Explanatory Memorandum notes that Schedule 4 fully implements the ‘Mandating Climate-Related Financial Disclosure’ measure in the 2023–2024 MYEFO,[127] which is estimated to decrease budget receipts by $24.7 million over the forward estimates period (2024–25 to 2026–27).[128]
Commencement
Schedule 4 of the Bill commences on the day after Royal Assent.[129] As noted, the requirement to prepare a sustainability report will be progressively phased in for different entities based on the size of the entity.
Schedules 1, 2, 3 and 5 – Financial Market Infrastructure Regulatory Reforms
Background
What are financial market infrastructures?
Schedules 1, 2, 3 and 5 to the Bill aim to strengthen regulatory arrangements for Australia’s financial market infrastructures (FMIs), particularly in relation to clearing and settlement facilities.[130]
FMIs are the systems and networks that enable the execution, clearing, and settlement of financial transactions.[131] Without these infrastructures, investors would not be able to conduct vast volumes of financial transactions daily. FMIs encompass various systems and networks, including payment systems, central counterparty clearing houses, and securities settlement facilities.[132]
According to the Bank of England in this explanatory video, FMIs are commonly referred to as ‘the plumbing of the financial system’.[133] This is because although most FMIs are hidden to the public, they are crucial for the smooth operation of financial markets, similar to how water plumbing is a hidden but crucial component of a home.
Drawing an analogy from transportation: well-maintained transport infrastructures (roads, railways, airports) are vital for people to travel safely and quickly. In the same vein, well‑maintained FMIs are essential for investors to buy and sell financial products smoothly and efficiently.
Some of Australia’s roads and railways are privately owned and operated. Similarly, some of Australia’s FMIs are operated by companies owned by private investors. For example, the Australian Securities Exchange (ASX) Ltd, a publicly traded company with many private investors,[134] is the dominant operator of clearing and settlement facilities for the Australian share market.[135]
Government agencies are responsible for regulating vehicle safety standards and updating traffic rules for the purpose of minimising traffic accidents. Likewise, financial regulatory agencies – including the Reserve Bank of Australia (RBA) and the Australian Securities and Investments Commission (ASIC) – are responsible for overseeing Australia’s FMIs, including those that are privately owned.[136] The RBA is responsible for promoting safe and resilient FMIs,[137] while ASIC is responsible for supervising the operators of FMIs.[138]
Regulatory oversight of ASX Ltd
As noted, ASX Ltd operates some of Australia’s key FMIs, particularly clearing and settlement facilities. Consequently, ASX Ltd is subject to regulatory oversight to ensure that these FMIs meet rigorous standards of security and efficiency.
For example, any investor seeking to own more than 15% of voting power (typically equivalent to share ownership) in ASX Ltd must obtain approval via a regulation.[139] Any such regulation can be disallowed by a majority vote in either chamber of Parliament.
In 2010, a Singaporean company attempted to acquire over 15% of ASX Ltd, but this attempt was blocked by then-Treasurer Wayne Swan, under foreign investment laws, on the grounds that the takeover was not in Australia’s national interest.[140]
The Australian Broadcasting Corporation speculated that even if Treasurer Swan gave approval to the foreign takeover, the Parliament would not approve a change in regulations under the Corporations Act to allow the deal to proceed.[141] This reflected the importance of maintaining regulatory oversight over the ownership of ASX Ltd due to its role as an operator of Australia’s FMIs, particularly in relation to clearing and settlement facilities.
What is clearing and settlement in finance?
Figure 4 indicates that clearing and settlement (CS) facilities are ‘systematically important FMIs’ in Australia.[142] The Council of Financial Regulators (CFR), a coordinating organisation for Australia’s financial regulatory agencies, highlights how crucial CS facilities are to the smooth operation of Australia’s financial markets:
FMIs support transactions in securities with a total annual value of $16 trillion and derivatives with a total annual value of $185 trillion. These markets turn over value equivalent to Australia's annual GDP every three business days. Without clearing and settlement facilities, and access to financial benchmarks, many financial markets could not operate.[143] [emphasis added]
Figure 4: FMI landscape in Australia
Source: International Monetary Fund (IMF), ‘IMF Financial Sector Assessment Program, 2019 Technical Note – Supervision, Oversight and Resolution Planning of Financial Market Infrastructures’, 11.
Drawing an analogy from real estate: investor Ian has successfully bid for a house at auction. A crucial step in the purchase process is for Ian to pay the seller and ‘settle’ the transaction. This means Ian may need to hire conveyancing lawyers to handle the property settlement process and ensure that the housing title is transferred to his name.
Turning to the financial industry, Ian has purchased some company shares on the ASX trading platform. A crucial step in the purchase process is for Ian to ‘settle’ the financial transaction with the seller. In other words, the transaction must be effected through CS facilities to confirm Ian as the new owner of the shares.
ASX Ltd – through its subsidiaries ASX Clear and ASX Settlement – is the sole provider of clearing and settlement services for Australia’s cash equity market.[144] This means Ian has to pay brokerage fees to receive clearing and settlement services from ASX.[145]
If the CS facilities owned and operated by ASX experience a system outage or congestion, then Ian and millions of other investors would not be able to purchase and sell equities. As noted, FMIs enable millions of financial transactions to occur daily, and disruption to this traffic could cause immeasurable harm to the Australian economy.
In 2019, the Council of Financial Regulators warned that a vast number of financial transactions in Australia are centrally cleared and settled (mostly through CS facilities operated by ASX), and this has:
… led to a concentration of risks in the clearing and settlement facilities themselves.
Disruption at an FMI or the failure of its operations would prevent some or all of the usual activity that it facilitated taking place, severely undermining the operation of the financial system… The CFR is proposing a broad package of reforms to improve the regulation of FMIs in Australia.[146]
ASX system outage on 16 November 2020
Just as roads can deteriorate and become congested over time, FMIs can also age and grow increasingly susceptible to crises. On 16 November 2020, the ASX trading platform experienced a system outage triggered by a software glitch. The problem prompted ASX to pause stock trading at 10:24am, and trading did not resume for the remainder of the day.[147] Some investors suffered financial losses due to the outage and demanded compensation.[148]
Following the outage on 16 November 2020, ASX Ltd commissioned IBM Australia Ltd to undertake an independent review of the ASX Trade Refresh project.[149] The review found that the CS facilities operated by ASX did not directly cause the outage. However, the review also identified several key shortcomings in the ASX governance processes that could affect the efficiency of CS facilities if not addressed.[150]
The RBA concluded that:
While the CS facilities were not responsible for the incidents affecting ASX trading systems, ASX applies a group-wide approach to operational risk and project management, so there is a risk that the shortcomings identified by IBM in the ASX Trade Refresh project could affect the CS facilities if not addressed.
Accordingly, the Bank will work closely with ASIC and ASX to ensure that any relevant findings or recommendations from the IBM review are applied to its clearing and settlement operations, and in particular to the CHESS replacement program.[151] [emphasis added]
ASX failure to replace its decades-old CHESS system
ASX Ltd is a licensed operator of CS facilities in Australia.[152] As noted, it maintains a monopoly over some of Australia’s FMIs, including the CHESS system, which handles the clearing and settlement of stock trading conducted through ASX.[153]
The CHESS system, or the Clearing House Electronic Subregister System, is a crucial FMI that enables financial transactions to be cleared and settled.[154] ASX relies on the CHESS system to act as a ‘middleman’ (known as a central counterparty) between investors, and to maintain its monopoly over the provision of clearing and settlement services for Australia’s share market.
The ASX’s monopolistic position has come under heavy criticism in recent years, particularly in the wake of its system outage and subsequent failure to replace its decades-old CHESS system.[155] The CHESS system was developed and has been operational since the early 1990s. As the technology on which CHESS has been built is three-decades old, it struggles to efficiently support the increasing scale and complexity of modern financial markets.[156]
In 2016, ASX enlisted an American startup company to build a blockchain replacement for CHESS. However, after years of delays and setbacks, in November 2022 ASX announced that its CHESS replacement project had failed to meet expectations.[157]
The ASX failure to replace the CHESS system has highlighted regulatory gaps in the supervision of financial market infrastructures. As noted, the RBA is responsible for promoting resilient FMIs to support financial stability.[158]
The Australian Financial Review reported that:
ASX’s monopoly on clearing and settling cash equity market trades is under threat amid political and investor fury over the exchange’s failure to deliver a critical project to update the technology underpinning the sharemarket.
… Queensland Liberal Senator Paul Scarr put the heat back on the regulators [ASIC and RBA], suggesting they consider whether ASX’s control of the critical national infrastructure creates a conflict of interest that should force a change to market structure. [159] [emphasis added]
Furthermore, the Australian Financial Review argued:
ASX tech disaster exposes regulatory holes. It is time for Treasurer Jim Chalmers to take a keen interest in the country’s financial market infrastructure and review the clearing and settlement processes as well as its supervision.[160]
The Government’s commitment to improve regulatory arrangements for FMIs
On 14 December 2022, Treasurer Jim Chalmers issued a media statement announcing the Albanese Government’s commitment to undertake reforms aimed at enhancing Australia’s financial system. To that end, the Government would act on recommendations by the Council of Financial Regulators (CFR) to improve regulatory arrangements for Australia’s FMIs.[161]
In its Financial Market Infrastructure Regulatory Reforms – Advice to Government from the Council of Financial Regulators report released in July 2020, the CFR identified several regulatory gaps in relation to FMIs. Specifically, the CFR pointed out:
- Financial regulatory agencies (specifically, ASIC and RBA) do not have crisis management powers to resolve a distressed clearing and settlement facility.
- The distribution of powers between the Minister, ASIC, and the RBA does not correspond to their legislative mandates or international best practice.
- The regulators do not have sufficient supervisory or enforcement powers to most effectively monitor or manage the risks posed by FMIs to the orderly provision of services and financial stability.[162]
The CFR made several recommendations to address these regulatory gaps.[163] The CFR recommendations build on the findings of earlier government reports and international reviews, including the 2014 Financial System Inquiry (also known as ‘The Murray Inquiry’) and the IMF’s 2019 Financial Sector Assessment Program review.[164]
Key issues and provisions
Schedules 1, 2 and 3 of the Bill implement the recommendations contained in the CFR’s Financial Market Infrastructure Regulatory Reforms report by:
- introducing a crisis management and resolution regime through the amendments in Schedule 1
- strengthening ASIC and the RBA’s licensing, supervisory and enforcement powers through the amendments in Schedule 2
- making changes to and adjusting roles and responsibilities between the Minister, ASIC and the RBA through the amendments in Schedule 3.[165]
Schedule 5 makes related minor and technical amendments to Commonwealth legislation to enable the implementation of the recommendations.[166]
Establishment of a crisis resolution regime for distressed FMIs
Schedule 1 amends the Corporations Act to establish a crisis resolution regime for distressed FMIs. The proposed crisis resolution regime empowers the RBA to step in and take actions when a CS facility is in distress or facing an imminent crisis.[167] In other words, the crisis resolution regime would give RBA the tools it needs to support the continued operation of distressed CS facilities considering their critical market functions.
To that end, the Bill inserts proposed sections 830B and 832A to the Corporations Act to empower the RBA to appoint a statutory manager to take control of a CS facility that is experiencing significant distress or crisis.[168] This new power is known as ‘statutory management’ and is a part of the crisis resolution regime established to handle situations where a CS facility fails or is at risk of failing, which could impact financial stability.
Specifically, the proposed sections give the statutory manager powers to take over the management of the CS facility, replacing the board of directors, and managing the operations of the facility to ensure the stability of the broader financial system. The statutory manager can make decisions about the operations, management, and the strategic direction of the facility during the crisis period.[169]
The Bill also inserts proposed section 835B to give a new ‘directions power’ to the RBA.[170] This means the RBA can direct statutory managers to take specific actions concerning the affairs of a CS facility.[171]
The Treasurer, with the written approval of the Finance Minister, is permitted to activate a maximum appropriation of up to $5 billion in a CS facility crisis event. This appropriation is designated to support the essential operations of domestic clearing and settlement facilities during a crisis.[172] The Australian Financial Review commented this $5 billion appropriation mechanism will ‘only be used in the most extreme instances of market crisis’.[173]
While the Bill gives the RBA the power to appoint a statutory manager to step in and take control of distressed CS facilities, it also empowers the RBA to take preventative measures that can help avoid them occurring in the first place.
To that end, provisions in Schedules 1 and 2 introduce a suite of general powers for the RBA, including imposing notification requirements, issuing directives, engaging in resolution planning, and setting resolvability standards.[174]
In particular, proposed section 821BA (at item 26 of Schedule 1) empowers the RBA to impose notification obligations on a CS facility operator: CS facility licensees are obligated to notify the RBA of material changes that could lead to distress, thereby increasing the RBA’s ability to mitigate the risk of crises materialising. Failure to comply is an offence.
Enhanced supervisory and licensing powers
As noted, CS facilities are essential to the smooth functioning of Australia’s financial markets. Given their importance, CS facilities must be licensed under the Corporations Act, which mandates that these facilities must have appropriate operational rules and procedures to ensure they function in a fair and effective manner.[175]
Once licensed, the CS facility licensees are subject to the continuous oversight of both the RBA and ASIC. The RBA is tasked with annual compliance assessment of each licensed facility against established Financial Stability Standards, while ASIC ensures compliance with other supervisory responsibilities.[176]
At the time of writing, there are 7 licensed CS facilities operating in Australia, 3 of which are subsidiaries of ASX Ltd.[177] Nevertheless, since 2011, ASX Ltd has faced some competition from overseas CS facility licensees operating in Australia.[178]
Provisions in Schedules 2 and 3 provide ASIC with enhanced supervisory and licensing powers to regulate CS facility licensees. Details of ASIC’s new powers are specified in pages 92 to 95 of the Explanatory Memorandum.
Transfer of certain ministerial powers to regulators
Currently the Minister has responsibility for a number of operational decisions in relation to licensing and supervision of CS facility operators. The Bill includes provisions to transfer certain ministerial powers to regulators to streamline the regulation of FMIs.[179] This implements recommendation 2 of the CFR’s Financial Market Infrastructure Regulatory Reforms report. Specifically, the CFR argued that the rationale for the transfer of ministerial powers is:
Effective regulation relies on a clear separation of responsibilities between the Government and regulators, with the Government responsible for making and reviewing laws and independent regulators empowered to apply those laws in an objective and impartial manner. The current arrangements, where the Minister has responsibility for a number of operational decisions in relation to licensing and supervision of market operators and clearing and settlement facility operators, is inconsistent with this approach and out of step with comparable international regimes.[180]
Details of ASIC’s new powers are specified in pages 89 to 92 of the Explanatory Memorandum.
Transfer of power to the Minister to approve increases in voting power
As noted, ASX Ltd is subject to a 15% ownership limitation under the Corporations Act.[181] This means any investor seeking to own more than 15% of ASX Ltd must obtain approval by regulation. Any such regulation would be subject to disallowance by Parliament.
Schedule 2 amends the Corporations Act to:
- provide that the Minister’s approval is only required when an investor seeks to own more than 20% (rather than 15%) of ASX Ltd[182]
- remove the requirement for approval by regulation; in other words, the Minister (Treasurer) would have ‘total discretion’ to approve or reject the approval.[183]
The repeal of subsection 850B(2) implements a recommendation of the CFR.[184] The Coalition and the Australian Greens oppose this amendment (see the ‘Policy position of non-government parties’ section).
Policy position of non-government parties/independents
Coalition
In their Dissenting Report on the Bill, the Coalition Senators raised concerns about the amendment to section 850B of the Corporations Act.
Currently any investor seeking to own more than 15% of ASX Ltd must obtain approval via regulation. The amendment would remove the requirement for increases in voting power above 15% to be approved through regulation. Coalition Senators are concerned the Treasurer would have ‘total discretion’ to approve or reject such increases, a decision that would not be subject to disallowance.[185]
The Coalition Senators said they are of the view that the Parliament should retain some scrutiny over these approvals concerning ASX ownership, instead of leaving it entirely to the Minister of the day.[186] Consequently, the Senators recommended:
That the Bill be amended to retain the requirement for regulations to be made for the purpose of subsection 850B(1)(c) of the Corporations Act 2001, and to retain their disallowability under subsection 850B(2).[187]
Australian Greens
The Australian Greens argued: ‘the ASX is public infrastructure that—like much of Australia public infrastructure and institutions—should never have been privatised’.[188]
ASX was formed in 1987 after the Australian Parliament passed legislation enabling the amalgamation of six independent state-based stock exchanges.[189] Although ASX was not a government-owned organisation at the time, it was a mutual organisation owned by Australian stockbrokers.[190]
In 1998, ASX was demutualised and became a publicly traded company.[191] This transition enabled any individual or organisation (foreign or domestic) to buy shares and gain partial ownership of ASX Ltd.
Considering the ASX’s dominant role in the Australian financial markets, some commentators have argued that the Australian Government, rather than private individuals or foreign companies, should have greater oversight of ASX operation to better protect public interests.[192]
The Australian Greens criticised the proposal to weaken ministerial approval powers over ownership of ASX.[193] If the Bill is passed, investors would only need the Treasurer’s approval when seeking to own more than 20% of voting power in ASX.
Consequently, the Greens recommended:
In the absence of any compelling justification from the Government, Part 4 of Schedule 2 that lifts the ownership threshold from 15% to 20% voting power in ASX Limited in order to require Ministerial approval should be removed from the Bill.[194]
Position of major interest groups
In December 2023, the Treasury conducted a consultation process and sought stakeholder feedback regarding FMI regulatory reforms. Fifteen stakeholders made written submissions, and the Senate Economics Legislation Committee noted the ‘overwhelmingly positive support’ from stakeholders for the proposed FMI reforms.[195]
ASX Ltd
ASX Ltd is the dominant operator of CS facilities in Australia. As such, changes in the regulation of FMIs, especially those that impact licensing and crisis management protocols, could significantly affect ASX’s interests.
While ASX is broadly supportive of the reform measures to increase the resilience of the financial system,[196] it has expressed concerns regarding specific provisions of the Bill. For example, the Bill empowers the RBA to appoint a statutory manager to take control of a CS facility that is experiencing significant distress or crisis. ASX expresses concerns about the broad powers given to a statutory manager:
ASX considers that certain powers proposed in the draft legislation go beyond what is necessary to allow the statutory manager to efficiently carry out their functions and powers in resolving a CS facility or are unnecessary in light of other provisions in the exposure draft legislation. With the principles of proportionality and necessity in mind, ASX submits that certain powers of the statutory manager should be removed or limited, including the powers to amend a body corporate’s constitution and information gathering powers.[197] [emphasis added]
ASX suggests that a statutory manager’s powers should not impede the essential operational activities of the CS facilities.
Furthermore, ASX has expressed concerns that potential abuse of the RBA’s new powers, especially in transferring ownership or taking control of a CS facility during a crisis, could undermine the fair value of assets for asset holders:
Given the breadth and seriousness of the proposed powers, it is also appropriate that the resolution powers are balanced with adequate protections for asset holders. ... ASX considers protections for asset holders should not impede the timely transfer of the shares or business of the [CS] facility when necessary in a crisis situation. Rather, these protections should ensure that the decision is only taken as a last resort, that there is an appropriate level of transparency regarding the fair value of the assets via an expert report and that compensation is available to asset holders for any difference between the value realised under a transfer determination and the fair value of the assets.[198]
These concerns reflect ASX’s acknowledgement that while statutory management powers are necessary for crisis resolution, they must be executed in a way that does not compromise the rights of licenced CS facility operators.
Cboe Australia
Cboe Australia is a rival share trading exchange to ASX Ltd.[199] As noted, currently ASX is a monopolistic provider of clearing and settlement services for Australia’s share market. At the same time, ASX provides Cboe non‑discriminatory access to its CS facilities through commercial arrangements (known as ‘Trade Acceptance Service’).[200] This means Cboe is not a licensed operator of CS facilities; rather, Cboe pays service fees to ASX in order to access the latter’s CS facilities. The Australian Financial Review speculated that ‘Cboe plots ambitious plan to erode ASX dominance’ in the provision of clearing and settlement services.[201]
Cboe is generally supportive of the FMI reforms, and it has articulated its policy position with a particular focus on enhancing competition within the financial sector:
[Cboe] is strongly of the view that a lack of competition was a critical factor in the negative outcomes of the initial CHESS replacement project, where the monopoly clearing provider’s failed technology migration cost the financial industry several hundred million dollars’ worth of wasted output. The failed replacement project continues to have a negative impact on Australian investors, participants, markets, and the broader financial system, while the Australian clearing environment continues to be characterised by high fees, a lack of product innovation, and outdated infrastructure.[202]
Put simply, Cboe argues ASX’s monopoly in the provision of clearing and settlement services has led to outdated infrastructure, and that these issues could have been mitigated with a more competitive environment. As such, Cboe strongly advocates for several specific regulatory changes that support competition, suggesting that such measures are essential for preventing monopolistic practices and improving the overall health of the financial market infrastructure.[203]
CME
The Chicago Mercantile Exchange (CME) is incorporated in the United States and operates in Australia under an overseas CS facility licence.[204] This allows the CME to provide clearing and settlement services in the Australian financial markets to complement its global operations in derivatives trading and other financial products.
Since 2011, ASX has faced competition from overseas CS facility licensees in some financial markets, including competition from CME for over-the-counter derivatives clearing services.[205]
In its written submission to the Treasury, the CME emphasises the importance of mutual deference for effective cross-border operations of FMIs.[206] Mutual deference in the context of FMI regulation refers to the principle whereby regulators in one jurisdiction recognise and respect the regulatory frameworks of another jurisdiction. Mutual deference is especially important for corporations that operate across borders, as it helps to reduce regulatory duplication and conflicts.
Put simply, the CME argues that certain provisions in the Bill should be amended to explicitly exclude overseas CS facility licensees from domestic crisis management powers unless requested by regulators in foreign countries (in this case, the US).
Financial implications
Schedules 1, 2, 3 and 5 are estimated to have no cost to Government over the forward estimates period.[207]
Commencement
The amendments that establish the FMI crisis resolution powers and the crisis prevention powers in Schedule 1 and Part 9 of Schedule 2 of the Bill commence on the seventh day after Royal Assent.[208]
For Schedule 2 of the Bill:
Schedule 3 of the Bill commences 7 days after Royal Assent.
Schedule 5 to the Bill commences on the day after Royal Assent.[209]