Hello and welcome to the BRR Legal Brief, where we bring you the latest legal issues affecting corporate Australia.  With a price on carbon being introduced in Australia from 1 July this year, many entities will now be considering whether they need to obtain a financial services licence.  Joining me to discuss the scheme and also the many issues that arise, is Fiona Melville, who’s a Partner from Middletons.  Fiona welcome.

Thank you.

Well Fiona the Clean Energy Regulator has identified 248 liable entities under the Act, will they all need to obtain a financial services licence?

No they won’t.  The reason why some of them might need to have a Financial Service Licence is because from 1 July carbon units, Australian carbon credits and international eligible emission units will all be classified as financial products.  So certain kinds of financial services in relation to those products will require a licence.  But ASIC has also very usefully issued some exemptions; so for liable entities with modest attributable emissions or modest liability, then they are unlikely to need to have a licence.

Okay and Fiona what exemptions are available?

Well there’s an exemption for buying and selling, all three classes of units, for your own behalf.  There’s an exemption for buying and selling for related entities, but those related entities have to be liable entities under the scheme.  There’s an exemption if you’re buying on a forward basis, so derivative contracts, but that exemption you need to be buying for compliance purposes, so either for yourself or your related entities.  And then there’s also a narrow exemption for making a market, if you’re one of the trade exposed entities who gets free units.  So the idea of that being if you’ve got free units the purpose of getting them is to sell and to pay your electricity bills and so you’re obviously going to need to be stating the price that you’re willing to sell them for, and so the Government have agreed to have a specific exemption for those entities.

Well Fiona there seems like there’s a long list of exemptions there, what will cause entities to require a licence?

Primarily what will cause them to require a licence is forward trading for non-compliance purposes.  And it’s very easy to be caught in that category, because you might start off thinking that you’re forward purchasing for your own compliance, but then it might be part way through the year your emissions profile drops, so you don’t actually need as many units, and so at that point you might then start to readjust your portfolio, if you then start to sell those units you are no longer buying them for compliance reasons.  And then secondly if you’ve got – if you’re a large liable entity and so you’ve got a significant liability, you’re almost certainly going to want to have an active trading desk, and your active trading desk is going to be buying and selling units regularly; which means they’ll be regularly stating prices, and that falls into the category of making a market.  And then finally you will need a licence if you’re advising.

Okay.  Well in Australia we are having a fixed price for the first three years; does that make the need of getting a licence pressing in the early stages?

Theoretically no, because for the first three years as you say, entities will simply be writing a cheque to the Regulator.  However, if you’re large liable entity you are going to know that you have a liability going forward and from 2015 the prices will be market price and I’m on the Australian Financial Market Association’s Carbon Committee and on that committee there’s a variety of banks and brokers.  So for example there’s ANZ, Westpac, NAB, CBA, and they all expect trading to start fairly quickly.  That’s likely to be trading in international units that can be used from 2015, as opposed to carbon units.

Okay.  And Fiona obviously we have the starting point from 1 July this year.  Will entities need to obtain a licence before that time?

The Government realised that there’s going to be a lot of entities who are going to be apply for licences.  So what they’ve done is put in some transitional provisions; and so the transitional provisions on the face of it mean you don’t need to have a licence to do certain activities.  But in order to take advantage of the transitional provisions you have to register with ASIC, which started 1 May and it goes through to 30 June, so there’s just two months to register.  Then to register the fact that you intend to apply for a licence, or you intend to vary your licence, then you have to actually put that variation or application in between 1 July and 31 October and then you have to actually get your licence issued by 31 December.  So there is this six month provision for transition but unfortunately what it doesn’t cover is derivative trading in these units, and it’s likely that the derivative trading is the very thing that most entities are going to want to do.  So for energy participants who have already got a licence they’re licence almost always covers them for all kinds of derivatives so they’re fine.  But for liable entities that aren’t licenced this transition is probably not of that much use to them.

Okay and we’ve talked about the fact that we’re still in the early stages, do you think ASIC is likely to receive a lot of applications in the early stages?

Yes.  I had a look at their website and they’ve already got a public list now.  So there’s five entities at the moment which doesn’t sound very many, but there were quite a few problems with the form, so I think a lot of entities wanted to get clarification about some of the questions before they put the form in.  Certainly most of the energy industry clients, people in AFMA, on that working group, they’re all expecting to put in their - firstly to register and then to have their licence variation.  People can’t actually put in the application to vary the licence yet, because the form hasn’t been changed, so we’ve got to wait for that.  But that’s expected to happen by 1 July.

And we’ve talked a little bit about forms and the different exemptions that will apply, but what about the process, is it likely to be a difficult process to obtain a licence?

It is a complex process.  The electricity industry went through the requirement to obtain the licence in 2004/2005, and we found that it probably took most of them about six months of admin time, getting all of the documentation that’s necessary to prove to ASIC that you are a suitable person to have a licence.  So it is a long process, it’s quite expensive on administrative time, you do need to prepare quite a number of proofs and we had clients with folders of A4 size folders that would sort of like this thick, it was that detailed.

And Fiona the international price seems to be quite low; do you expect that many entities will be trying to take advantage of the international prices?

Well certainly the people in the AFMA Carbon Committee, the banks and brokers, are expecting that people will start trading.  They’ll start trading because the international price is low, but we have to remember that there is a floor price, so even through the price at the moment is round about $6 Australian dollars for some of the international units, the floor price is $15, but the details of the floor price haven’t been finalised.  So there still may be some advantages in entering contracts in the next six months, and that is certainly the expectation that AFMA have, and AFMA have prepared the documentation for people to trade these products.  So that is all ready, so people can use that documentation to start trading these products.

And Fiona today we’ve talked about a number of issues, what would be your top tips for entities in the coming months?

I think really the top tip would be to be prepared early, first of all obviously work out, and the list is on the Government’s website about the 256, but I think they’ve all been written too so I’m sure they all know who they are.  They need to first of all decide are they going to go for a licence, because there are exemptions and if they’re liability’s small they don’t need to have a licence, but if they decide that they’re going for a licence then they should start putting together a team pretty quickly, because one of the things every licensee needs is a responsible manager who’s going to be responsible for that part of the business, and those people have to be qualified and experienced in dealing in these products.  So if all of sudden we’re going to have another say 50 licensees all trying to find a responsible manager, that’s 50 responsible managers, and I think that the number of qualified people is going to be quite a tight fit there.  So that I would say move early.

It certainly sounds like some good advice.  Thank you so much for joining us today.

Thank you.

And listeners of course thank you for joining us, we hope that you can join us next week for our Legal Brief.