ERF contract not a financial product

Note: updated 24 March 2015

Seemingly from out of the blue, Treasury launched a consultation process on relaxing financial regulations around the ERF. Now, out of the blue, regulations have been passed ensuring that an ERF contract is not a financial product. Are you keeping up?

There's been a longstanding sigh that regulating carbon credits as financial products was a bit over the top. It means that carbon credits are regulated in the same way as shares or other financial products - this means you need a financial licence to advise on the money side (technical advice on emissions savings is okay). Is advising someone on planting a forest really the same as advising on a share acquisition? You can see the conundrum.

In January 2015 Treasury launched a consultation process aimed at relaxing the financial controls around the ERF. It wasn't clear where this came from; it had never come up at industry consultations. So I raised this at a recent industry workshop - it drew a blank. But given the discussion paper released by Treasury it was clear the idea was to loosen up the ERF process, making aggregation of projects and advising on getting into the ERF easier. Perhaps someone wanted to make the path to ERF results a little easier?

The consultation proposed relaxation in three areas: not making an ERF contract a financial product, not making aggregation of ERF participants subject to financial controls, and exempting incidental financial advice where the primary object is technical advice. Submissions were mixed - financial licence players arguing for the status quo (as they have the financial licences which are expensive to maintain!), and others pitching for some simplification in a highly regulated industry.

In the end, the government opted for an interim path: not making an ERF contract a financial product. This means participants have no concern about getting into any trouble because an ERF contract triggers any financial product or derivative controls. The Australian Securities and Investments Commission (ASIC), which regulates this area, clarified this means that:

a person is not required to hold an Australian financial services licence to provide advice about, or enter into, a carbon abatement contract.

ASIC Regulatory Guide 236 Do I need an AFS licence to participate in carbon markets? will be updated shortly to reflect this change - this might offer more on ASIC's thinking.

There are two glaring problems with this approach. The first is that we now have different regulation over different parts of the carbon market - sell to the government and no problems, but sell to a private company and all the financial product controls kick in. What a client really wants is advice on all options - where does the ERF end and other markets and financial products start? Second, and more important I think, is looking at consumer protection and integrity in the industry. This decision relaxes financial requirements without a broader discussion of appropriate consumer protections. Financial licences might not be the best and only way.

Carbon projects are about much more than just finance and any proper consumer protection needs to take account of this. Apart from financial regulations, there are currently no other required industry standards. In our submission, we argued for compulsory disclosure documents and an industry accreditation scheme, such as previously proposed as part of the Carbon Skills program. Not much sign of these at present. For the moment the ERF auction process is eased, but we would encourage a broader debate around Keeping Carbon Clean.