ASIC releases consultation paper on director's duty to prevent insolvent trading

On 24 November 2009, ASIC announced the release of Consultation Paper 124 Directors’ duty to prevent insolvent trading: Guide for directors (CP124). CP124 and the guidelines, are ASIC’s way of emphasizing the need for directors, particularly those in small-to-medium enterprises in financial difficulty, to fully understand this duty.

CP 124 sets out the relevant legal background and the key principles that ASIC considers directors need to take into account in performing their duty to prevent insolvent trading.

Those principles are that a director:

• must keep him or herself informed about the financial affairs of the company and regularly assess the company’s solvency;
• immediately on identifying concerns about the company’s viability, should take positive steps to confirm the company’s financial position and realistically assess the options available to deal with the company’s financial difficulties;
• should obtain appropriate advice from a suitably qualified person; and
• should consider and act appropriately on the advice received in a timely manner                

By releasing this consultation paper, ASIC is not only looking for ways to ensure directors are aware of their duties, but it is looking to understand the bigger picture. ASIC is hoping to obtain information on the use of external professionals and advisors to aid directors in meeting their duties, compliance costs with any additional obligations and the general ways a director could demonstrate compliance. This will aid ASIC in developing the assessment framework for establishing if there has been a breach of duty or not.

ASIC is seeking feedback on these proposals by 22 January 2010.

For a copy of CP124 please use this link Consultation Paper 124

Australian PJC recommendations for Financial Advisors

On 24 November 2009, Investor Daily reported that the Parliamentary Joint Committee (PJC) on Corporations and Financial Services Inquiry into Financial Products and Services in Australia had released its recommendations. The recommendations focused on, but were not limited to, financial advising. 

The most significant recommendations are detailed below. The recommendations will require changes to legislation, regulations, regulator powers and an increased reliance on industry associations. Key recommendations are:

• Recognition the fiduciary duty by financial planners to put the interests of their clients first
• Overhaul of commission payment system to avoid conflict of interests and volume bonuses
• Making the cost of financial advice tax deductible for consumers.
• ASIC to work together with the industry to form a professional standards board that advisers would be required to join. The body would establish, monitor and oversee competency and conduct standards.
• ASIC to be resourced to perform risk-based surveillance of the advice provided under an Australian financial services licence.
• Extending ASIC powers to remove individuals and licensees from providing financial services.
• The government to investigate options for a last resort compensation scheme

These recommendations were the result of a significant consultation process and have been welcomed by many industry associations. As reported in Investor Daily’s article, FPA chief executive Jo-Anne Bloch said the recommendations will improve professional standards in the industry. "Recognising that duty of care is a fiduciary duty enshrined in law will lift the conduct and standards of the industry. Giving ASIC risk-based surveillance powers is proactive regulation," Bloch said.

For further information please see PJC Article