As business prepares for a year of heightened economic uncertainty and unprecedented legislative change, Olivia Collings spoke with in-house lawyers from a diverse range of industry sectors to find out their take on the road ahead.
As business prepares for a year of heightened economic uncertainty and unprecedented legislative change, Olivia Collings spoke with in-house lawyers from a diverse range of industry sectors to find out their take on the road ahead.RETAIL
The Australian retail sector has been facing tough conditions for the past few years and 2012 is set to be no different. A slower world economy, the growth of online retailing and weak consumer confidence have all played a part in making the sector more vulnerable than usual.
The Australian Retailers Association is predicating sector growth of around 2.3 percent this year following one of its worst years in history. According to a Deloitte Access Economics report the sector grew only 1.3 percent in the 12 months to June 2011, making it the worst year in two decades. Meanwhile the Australian Bureau of Statistics reports show retail sales grew 2.4 percent in 2011. However, in the crucial month of December, retail sales fell 0.1 percent.
For general counsels in the sector this manifests itself in renewed budgetary challenges and new obstacles. “The key challenges for the year ahead will be determined by what happens in the global
economy,” says Westfield Group general counsel Simon Tuxen. “There is a lot of uncertainty and the capacity for really serious disruption if things don’t go right in Europe.”
At Woolworths the situation is no different. Group legal manager – corporate and commercial, Rod Bordignon says the low margin retailer is continuing to face “challenging trading conditions” in the
consumer marketplace. In order to address this and ensure profitability now and in the future the company is looking at introducing new businesses and channels, selling some existing businesses, changing the mix within stores and more. “Our legal team is heavily involved in all of these areas,” he adds.
Regulatory requirements and the new Carbon Tax are also set to impact the sector which is already struggling. “[Regulatory requirements] have been a significant burden in the last four or five years and I don’t see that changing. But I don’t see the burden getting significantly worse as a result of new laws,” says Tuxen.
In the case of Westfield, Tuxen nominates the harmonisation of OH &S laws as a key legislative change. “There will be a significant dialogue with boards because directors will want to understand what the regime is,” says Tuxen. While it won’t necessarily require a significant amount of change, Tuxen says the introduction of the harmonised laws in Queensland, NSW, Northern Territory and the ACT “is a good opportunity for the legal team to go back and reinforce the basics.”
The hotly debated carbon tax or carbon price is set to have significant flow-on impacts at Woolworths. For example pass-through costs from upstream include energy supplies and cost of goods increasing overall, while downstream costs include landfill levies. Woolworths has been investing in energy efficiency and low carbon technology to minimise the effect of a carbon price in recent years.
The legal team has played its part in those efforts, particularly in terms of equipment procurement and advising on lease-related aspects in relation to stores and will continue to have a role to play as suppliers and other business partners feel the full effect of the price.
As with many areas of business, the legal departments of Westfield and Woolworths have both felt the pressure to do more for less.”It’s a challenge as it is there every year,” says Tuxen. “Working smarter, being more efficient… Every corporation in the current environment is looking for ways to deliver value and better service without increasing staff.”
In order to address cost pressure Tuxen says he will be looking at maximising external law firm advice. “We will be making sure their services are being delivered to us in a cost effective way,” he says, indicating that he will be using fixed prices on certain types of work as a key tool in keeping costs down. He is also looking at the legal process outsourcing proposition more carefully. “It’s an area that we will look at to see if there is any mileage,” he says.
Bordignon is also looking at costs pressures within his division: “A focus on costs is always a part of our mindset in retail. However, the tighter trading conditions in the consumer marketplace have brought a renewed focus on the cost of doing business across all of our divisions, including support functions such as legal.”
As a result of this Bordignon will be looking for external law firms to play a “more efficient and effective role” as they look to receive more value out of the legal spend. “We will look to target spending with those firms that invest in our relationship and can demonstrate measures to control costs. The firms that can best tailor their service offering to meet these objectives will become more important to us,” he says.
Firms working for Woolworths can also expect more of the work to be put out for competitive tender in areas where Bordignon feels they can achieve better value, “particularly on a project basis,” he says.
BANKING & FINANCE
2012 looks to be highly challenging for the banking and financial sector. In addition to the constant challenge of highly volatile markets, financial organsiations in Australia will this year also have to deal with the introduction of more regulatory requirements and more proposed regulatory changes.
On July 1 the Gillard Government is set to introduce the Future of Financial Advice (FOFA) Reforms, provided the Corporations Amendment (Future of Financial Advice) Bill and the Corporations
Amendment (Further Future of Financial Advice Measures) Bill pass through the parliament before then. However, this in itself is an issue for banking institutions and their legal advisers; as the implementation date draws nearer, details remain sketchy at best.
“The FOFA reforms in particular are generating a lot of work for us,” says Commonwealth Bank of Australia group general counsel David Cohen. “There is a lot of uncertainty around FOFA and the legislation. We have not been given a lot of detail about it, considering how significant its impacts will be.”
The wide-ranging FOFA reforms include the banning of asset based fees on geared funds, stricter licensing and banning powers for the corporate regulator the Australian Securities and Investment
Commission (ASIC). In preparation for the introduction of the reforms, ASIC has indicated it will be releasing new regulatory guides, including guide 98, which covers administrative action against financial services providers. However, any amendments to regulatory guidance are unlikely to be available to institutions before the July 1 introductory date.
AMP general counsel and company secretary, Brian Salter, says that as a result of these and other reforms much of his teams work to be focused on regulation and compliance: “We anticipate that the implementation of the Federal Government’s proposed new laws for the financial services industry will account for a greater percentage of our legal work in 2012,” he says. “Taking policy intentions and turning them into legislation is a complex and difficult task.”
ING Direct head of legal and compliance, Matt Sinnamon, adds: “With the extent of regulatory changes coming through, I anticipate the team will be spending a significant amount of time researching and understanding these changes – assessing the impact they will have on our business and advising the business on how to respond.”
On top of FOFA, Stronger Super reforms including SuperStream (measures to improve the ‘back office’ efficiency of the superannuation industry) are set to begin early next year while other aspects of the reform including MySuper are due to start in July 2013. The raft of changes proposed for the superannuation sector comes after months of consultation. “A lot of our work last year was spent on lodging submissions on upcoming regulation whereas this year it is the implementation of that
regulation and getting into the nitty gritty of the changes and how they impact the business,” says Cohen.
However, according to Salter, more submissions and negotiations are also on the cards in 2012. “We see an important role for AMP, and the rest of the financial services industry, to participate in the process [consultation] to achieve good legislative outcomes within a framework of reasonable business obligations and cost,” he says. “The coming year has the potential to bring many opportunities for our industry and for our customers if we succeed in getting the implementation right.”
As with other sectors, keeping legal costs in check can be a constant challenge, for legal managers in the finance and banking sector. New regulation means new chances to miss something critical and understanding new legislation alone can be time intensive. In order to address this issue Cohen is seeking to keep costs flat by focussing on more judicious use of technology (eg reducing unnecessary multiple devices per person) and reducing discretionary expenditure (eg travel, external conferences).
Similarly, Sinnamon will be seeking to rein in costs by being vigilant on bills incurred through external legal advice. “We have continued to ensure we maintain a close working relationship with our panel firms which allow us to benefit from volume based discounting,” he says. “However, what remains important is the cost-benefit equation not merely the bottom line.”
MINING & RESOURCES
The Australian mining industry is touted as the backbone of the economy, but companies in the sector are increasingly facing tougher, more complex, regulation and taxation as the government seeks to capitalise on the sector’s prosperity.
Nerilee Rockman, vice president legal-commercial and supply chain at AngloGold Ashanti Australia describes the year ahead as an era of “unprecedented legislative change”. The increasingly complex regulatory environment elevates the level of risk, both to the individual role holder and the business itself, according to Rockman. OZ Minerals general counsel and company secretary Francesca Lee is also set for more government regulation, which she predicts will account for a greater percentage of the legal department’s work, “in many areas of the law”.
One of many new pieces of legislation to come into force in the next 12 months is the hotly debated carbon price. On July 1 2012, 500 operations across the country, such as power stations, mines
and heavy industry, will be liable to pay a fixed price of A$23 per tonne of carbon. However, while only 500 companies will be liable, many suppliers and customers down the line will feel the impact, resulting in contracts between those companies and suppliers being examined closely by legal teams. “There is certainly a spike in our work in that area, as we accommodate the details of the scheme into our business processes and contractual documentation,” says Rockman. “This is exacerbated by the fact that there seems to be a poor understanding of the scheme in many sectors of the market. Negotiating appropriate contractual outcomes is more difficult given this.”
According to Rockman, contractors in particular will be seeking to increase costs and pass costs onto customers as a result of the carbon tax. Negotiations with contractors have already begun at
AngloGold Ashanti Australia, although Rockman predicts a “flurry” of activity in the months before the introduction and immediately after. “I think a lot of companies won’t know for several months
the true impact of the carbon price,” she says. Once the scheme is fully operational, Rockman expect that the workload will reduce, as business processes and cost structures adapt to the scheme. “However I expect we will again see a material spike in three years if and when we move from the fixed price structure as foreshadowed,” she states.
July 1 is also the proposed start date for the Gillard Government’s Mineral Resources Rent Tax (MRRT ) a 30 percent tax on coal and iron ore companies expected to generate A$12 billion. As uranium, copper and gold are exempt from the tax, Rockman and Lee do not have to deal with the specifics of the proposal. Assuming the MRRT makes it through the senate and is passed into law, it may then face a High Court challenge from a number of mining companies on the grounds that the resources are property of the states, thus making the MRRT an unconstitutional tax on state property. However, the Federal Government has indicated it will argue it is a tax on profits made by the private sector, not resources. Assuming the MRRT overcomes these challenges, like any new tax, it is likely to generate disputes and litigation amongst companies impacted by the tax, generating even more work for legal teams and general counsels.
As a result of these changes and other government regulation, inter alia the new harmonised workplace laws and changes to the Corporations Act, Rockman says she has to increasingly help shape the direction of the business and the business processes to reflect and accommodate the new environment. “Our challenges are twofold,” she explains. “Namely synthesising the regulatory landscape into advice that is meaningful and specifically relevant to the realities of our business, and recommending actions that enable the business to operate within that landscape whilst achieving our corporate vision and targets.”
In order to achieve this Rockman regularly calls on external lawyers to provide specialist expertise in areas where she cannot justify a business case for a permanent in-house lawyer. However, as with other legal departments, costs are a constant battle for her and increasingly she is turning to fixed fees and secondees to manage this issue. “I see fixed fees as crucial, to enable legal work to be budgeted. The budget I have for our legal department is fixed and finite, and I cannot manage that if I do not insist on the same from the providers with whom we work,” she says.
Rockman has been requesting fixed fees for some time but says legal providers have only recently become better at honoring original quotes. “They are getting better at tracking and monitoring the costs compared to the original quote,” she says. “I have seen a noticeable improvement in the past six months.”
In addition, Rockman says law firms could do more to assist in-house legal teams. “Law firms should be far more proactive in telling me where think they can add value or assist us to adapt and advise in a new area of regulation,” says Rockman. “Given the fact law firms should be seeing the impact and approach across multiple clients in multiple sectors; I am often disappointed by the lack of proactive smarts offered.
INSURANCE
In recent years the Australian landscape has been plagued by floods, storms, droughts and bushfires, not to mention the Australian and international insurance players.
The 2011 financial year was a tough year for insurers according to the J.P. Morgan Deloitte General Insurance Industry Survey, as higher claims costs associated with elevated levels of catastrophe impacted profits. The joint survey reveals that sharp losses were incurred across property classes for all underwriters in commercial lines, personal lines and in particular reinsurers.
Increasingly the sector is also being faced with tougher regulatory burdens. In a recent industry survey of underwriters, regulatory burden and staffing tied for equal first (64 percent for both) as the top issue facing the industry. “Maintaining a strong compliance culture and ensuring regulatory compliance is an ongoing focus,” says ACE Insurance (ACE) general counsel, Australia & New Zealand, Jon Downes.
“Almost every legal task performed has a compliance aspect.” This year a particular challenge for the industry will be introduction of the Financial Advisers Act and the new prudential regime in New Zealand, where the market has been going through a phase of transition. At ACE Insurance this has necessitated ensuring a sufficient legal and compliance presence in New Zealand, and the relocation of a staff member from Sydney to New Zealand 15 months ago.
Allianz Australia general counsel Mathew Kaley also cites regulatory reform as a key issue for the industry and hence the legal departments of insurers. “2011 was a big year for regulatory reform in relation to insurance and I expect that will continue in 2012, likely at about the same rate,” he says.
Similarly, Anna Lenahan, group general counsel and company secretary at Suncorp Group says one of the main challenges for her and her legal team is that the volume of regulatory change has accelerated, along with government inquiries, such as the bushfire inquiry in Victoria and the flood inquiry in Queensland. She also cites anticipating the business impact of continued financial challenges in Europe and America as other key challenges for the business, including the impact of Basel III reforms.
On the prudential side, the Australian Prudential Regulation Authority (APRA ) is in the process of concluding significant changes to the capital requirements for insurers and has also conducted a wholesale review of its prudential standards.
Outside of these insurance specific regulatory matters, there were also a number of general changes of relevance to insurers, such as the introduction of the Personal Property Securities Regime and the proposal to revise the privacy legislation. “All of these matters have required significant work by the legal and compliance departments, and affected business units, within insurers to assess the changes being proposed,” says Kaley. “The work is not complete though; many of these initiatives will be continuing on into 2012. And no doubt there will be some more.”
The ACE Group of Companies acquired Combined Insurance in 2008, which resulted in legal integration occurring in Australia and New Zealand in 2010. Last year, there was focus on post integration matters but in 2012, with the increased size of the company, greater range of product lines and number of stakeholders, a key challenge for Downes and his team will be to ensure the business is appropriately serviced from a legal and compliance perspective. The legal and compliance team manages a diverse range of work: from multi-million dollar litigation, to providing sophisticated technical advice on policy wording, to advising on complex business arrangements with global customers all the way through to reviewing the legal requirements in respect of staff footy tipping competitions. As a result, Downes is looking to grow the team in the coming year. “As the business grows, the team needs to evolve with it,” he says.
However, having a bigger team also brings with it new challenges, such as keeping team members enthused and proactive. Downes addresses these issues by holding regular team meetings, performance reviews, training and development, encouragement, feedback and social activities. He also encourages his team to get amongst the business. “I believe that it is important that the team know and understand the business they are providing a service to, which also means getting to know work colleagues across the company and breaking down barriers,” he states.
Where it is necessary to use external legal service providers, Downes will generally use agreed capped fees. “ACE has developed a globally integrated legal costs management system which external firms have to use. This makes monitoring fees and agreeing costs much easier,” he says. Downes adds it is also critical for the firms he uses to have a commercial focus. “They need to be flexible in how they deliver their service, which again goes back to the relationship,” he states.