FINS3637: Wealth Management Advice
Lecture Two
Financial Services Regulations
Chapter 7 of the Corporations Act
Lecturer: Nidal Danoun
n.danoun@unsw.edu.au
FINS5537: Financial Planning Advice & Ethics
Lecture Two
Financial Services Regulations
Chapter 7 of the Corporations Act
Lecturer: Nidal Danoun
n.danoun@unsw.edu.au
References and Readings
• RG36
• RG175
• Thomson Financial Planning Handbook
• Corporations Act (Chapter 7)
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Financial Services Regulation Introduction
• Background
• Financial services inquiry (The Wallis Inquiry -1996)
• Recommendations – two regulators
1. Regulator responsible for prudential regulation of any entity that needed to be prudentially
regulated;
2. Regulator responsible for market and disclosure regulation of any financial products being
offered to Australian consumers.
• The Reserve Bank of Australia (RBA) retained its central banking functions
(banker for the banks), including responsibility for setting monetary policy and
most payment systems
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Two Key Regulators
• Australian Prudential Regulatory Authority – APRA
• Prudential regulator
• monitors ADIs, Insurers, Credit Unions, Superannuation Trustees (administering the SIS Act).
• Sets standards for solvency and investments
• Australian Securities Investment Commission – ASIC
• licensing regulator
• monitors supply of financial services and disclosure to retail consumers, applies licence standards in Corporations Act
• supervises conduct for monies paid for financial products and services
• supervises disclosure conduct for services
• consumer protection role
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Role of APRA
• APRA’s responsibilities:
• The authorisation and the ongoing prudential supervision
• The Administration of the following legislations
• Banking Act, 1959
• Insurance Act, 1973
• Life Insurance Act, 1995
• Superannuation Industry (Supervision) Act 1993
• APRA has power to issue Prudential Standards (as supplement to the
legislation)
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Role of ASIC
• Company Regulator:
• Formation and running of companies (i.e. company registration, liquidation, etc)
• Consumer Credit Regulator:
• License and regulate people and businesses engaged in consumer credit activities (including banks, credit unions, finance
companies, and mortgage and finance brokers) - National Consumer Credit Protection Act 2009.
• Markets Regulator:
• Assesses how effectively authorised financial markets are complying with their legal obligations to operate fair, orderly and
transparent markets with responsibility for the supervision of trading on Australia’s domestic licensed equity, derivatives and
futures markets.
• Financial Services Regulator (Role of ASIC in the financial advice space):
• Licenses and monitors financial services businesses to ensure that they operate efficiently, honestly and fairly.
• Other - registration of SMSF Auditors & insolvency practitioners
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ASIC
• ASIC administers the following legislation (or
relevant parts of) :
• Corporations Act 2001
• Australian Securities and Investments Commission Act 2001
• Insurance Contracts Act 1984
• Superannuation (Resolution of Complaints) Act 1993
• Superannuation Industry (Supervision) Act 1993
• Retirement Savings Accounts Act 1997
• Life Insurance Act 1995
• National Consumer Credit Protection Act 2009
• Medical Indemnity (Prudential Supervision and Product Standards) Act
2003.
• ASIC also administer the relevant regulations made under the above
legislations
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Financial Services Reforms
• Uniform Regulatory Framework
• Financial Services Reform Act 2001 - Enacted in 2002
• Inserting Chapter 7 into the Corporations Act 2001
• New regulatory framework governing licensing, conduct and disclosure of providers of
financial services commenced 2004
• In addition to the Corporations Act and Regulations there are also ASIC Guides and Policy
Papers
• Important Class Orders grant relief
• Gives ASIC the power to issue Class Orders (enforceable standards)
• Pros and cons of class order as compared to legislations
• Refinement to Financial Services Regulations in May 2005 - effective Dec 2005
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Financial Services Reforms – Recent Reforms
(Discussed next lecture)
• The Federal Parliamentary Joint Committee on Corporations and Financial
Services→ Chaired by Mr Bernie Ripoll→ The Ripoll Inquiry and Report
• The Future of Financial Advice - FOFA Tranche 1 & 2
– Voluntary compliance→ 1 July 2012
– Mandatory compliance→ 1 July 2013
• The Financial Services Enquiry
• Corporations Amendment (Professional Standards of Financial Advisers) Bill 2016
• FASEA → establishment and wind up
• The Quality of Advice Review (QAR) → Final report Recommendations
• Impact on Chapter 7 if the recommendations were to be accepted and legislated in full or in part.
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Recent Reforms and Developments
(Discussed next lecture)
• Limited licensing framework – Limited AFSL
• Tax Agent Services Act - TASA and Financial Product adviser
• From 1 July 2014 with a 3 year transition period
• SMSF Auditors Registration
• ASIC Regulatory Guide 243
• http://asic.gov.au/asic/pdflib.nsf/LookupByFileName/rg243-published-24-January-2013.pdf/$file/rg243-published-24-January-2013.pdf
• ASIC - Guidance→ Regulatory Guides
• Facilitative approach
• Review of External Dispute Resolution (EDR) and establishment of AFCA
• One stop shop for dispute resolution
• LIFE INSURANCE REMUNERATION REFORM REGULATIONS
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Financial Services Royal commission (FSRC)
• Commissioner Haynes’s work made four key observations
• The link between conduct and reward “Pursuit of gain/profit”
• Information asymmetry “imbalance of power and knowledge and knowledge between those
providing the product or service and those acquiring it”.
• Conflict of interest in many cases, the intermediary is paid by, and may act in the interests of,
the provider of the service or product. Or, if the intermediary does not act for the provider,
the intermediary may act only in the interests of the intermediary.”
• Holding financial services entities into account “financial services entities that broke the law
were not properly held to account. Misconduct will be deterred only if entities believe that
misconduct will be detected, denounced and justly punished”
• Recommendations
• Banking, financial advice, superannuation, Insurance, Culture governance and remuneration,
regulators, other important steps. (Covered next lecture)
FSRC Recommendations- Financial Advice
• Ongoing fee arrangements
• Recommendation 2.1 – Annual renewal and payment
• Lack of independence
• Recommendation 2.2 – Disclosure of lack of independence
• Quality of advice
• Recommendation 2.3 – Review of measures to improve the quality of advice
• Conflicted remuneration
• Recommendation 2.4 – Grandfathered commissions
• Recommendation 2.5 – Life risk insurance commissions
• Recommendation 2.6 – General insurance and consumer credit insurance
commissions
FSRC Recommendations- Financial Advice
• Professional discipline of financial advisers
• Recommendation 2.7 – Reference checking and information sharing
• Recommendation 2.8 – Reporting compliance concerns
• Recommendation 2.9 – Misconduct by financial advisers
• Recommendation 2.10 – A new disciplinary system
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Financial Services regulations (Chapter 7)
Background - Financial planning
• The process a financial planner follows to understand each client’s different
needs and financial objectives and to recommend an appropriate strategy.
• The financial planning process:
• 1. Gather financial information about the client
• 2. Identify financial and lifestyle goals
• 3. Identify any financial issues
• 4. Prepare a financial plan
• 5. Implement the plan
• 6. Review and revise the plan at regular intervals, or when circumstances change.
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Provision of Financial Services
• A person provides a financial service if they:
• (a) provide financial product advice;
• (b) deal in a financial product;
• (c) make a market for a financial product;
• (d) operate a registered scheme;
• (e) provide a custodial or depository service;
• (f) provide traditional trustee company services; or
• (g) engage in conduct of a kind prescribed in the Corporations Regulations 2001
(Corporations Regulations) (s766A )of the Corporations Act 2001 (Corporations Act).
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Provision of Financial Services
• A person must only provide financial services on behalf of another person
who carries on a financial services business if:
• The provider is the employee or director of the licensee or a related body corporate
of the licensee i.e. a representative
• The provider is an authorised representative of the licensee (i.e. Industry
terminology - part of a dealer group)
• The provider provides the service in their own right as an AFS licensee
• The provider is exempt
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Australian Financial Services Licence (AFSL)
• Single licensing framework
• Need to hold an AFSL if you carry on a financial services business in Australia (i.e. satisfy the
business test)
• unless an exemption in s911A(2) applies (i.e. Authorised Representatives s911A(2)(a))
• If you provide financial services as a representative of a licensee, you may need to hold an authorisation from that licensee.
• Licensees must comply with various licensee obligations, including
• s912A -General Obligations, and
• 912B Compensation arrangements if financial services provided to a retail client.
• While the primary obligation to ensure compliance with the financial services laws is imposed on
licensees, some obligations in the law apply directly to representatives.
• i.e. disclosure obligation, Best interest Duty, hawking prohibition, etc.
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Licensee Obligations
CORPORATIONS ACT 2001 - SECT 912A
General obligations
(1) A financial services licensee must:
(a) do all things necessary to ensure that the financial services covered by the licence are provided efficiently, honestly and fairly; and
(aa) have in place adequate arrangements for the management of conflicts of interest that may arise wholly, or partially, in relation to activities
undertaken by the licensee or a representative of the licensee in the provision of financial services as part of the financial services business of the
licensee or the representative; and
(b) comply with the conditions on the licence; and
(c) comply with the financial services laws; and
(ca) take reasonable steps to ensure that its representatives comply with the financial services laws; and
(d)unless the licensee is a body regulated by APRA--have available adequate resources (including financial, technological and human resources) to
provide the financial services covered by the licence and to carry out supervisory arrangements; and
(e) maintain the competence to provide those financial services; and
(f) ensure that its representatives are adequately trained, and are competent, to provide those financial services; and
(g) if those financial services are provided to persons as retail clients--have a dispute resolution system complying with subsection (2); and
(h) unless the licensee is a body regulated by APRA--have adequate risk management systems; and
(j) comply with any other obligations that are prescribed by regulations made for the purposes of this paragraph.
Source – Corporation Act
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Licensee Obligations
CORPORATIONS ACT 2001 - SECT 912A
(2) To comply with this subsection, a dispute resolution system must consist of:
(a) an internal dispute resolution procedure that:
(i) complies with standards, and requirements, made or approved by ASIC in accordance with regulations made for the
purposes of this subparagraph; and
(ii) covers complaints against the licensee made by retail clients in connection with
by the licence; and
(b) membership of one or more external dispute resolution schemes that:
the provision of all financial services covered
(i) is, or are, approved by ASIC in accordance with regulations made for the purposes of this subparagraph; and
(ii) covers, or together cover, complaints (other than complaints that may be dealt with by the Superannuation
Complaints Tribunal established by section 6 of the Superannuation (Resolution of Complaints) Act 1993 ) against the licensee made by retail clients in
connection with the provisionof all financial services covered by the licence.
(3) Regulations made for the purposes of subparagraph (2)(a)(i) or (2)(b)(i) may also deal with the variation or revocation of:
(a) standards or requirements made by ASIC; or
(b) approvals given by ASIC.
Source – Corporation Act
Licensee Obligations – (ASIC)
• https://asic.gov.au/for-finance-professionals/afs-licensees/your-
ongoing-afs-licence-obligations/
• Your (the licensee) ongoing AFS licence obligations
As an AFS licensee, you have a general obligation to do all things
necessary to ensure that you provide your financial services
efficiently, honestly and fairly.
Licensee Obligations – (ASIC)
You (the licensee) have specific obligations relating to:
• conduct and disclosure
• the provision of your financial services
• the competence, knowledge and skills of your responsible managers, as well as their good fame and
character
• the training and competence of your representatives and authorised representatives
• ensuring your representatives (including authorised representatives) comply with the financial services laws
• compliance, managing conflicts of interest and risk management
• the adequacy of your financial, technological and human resources, and
• your dispute resolution and compensation arrangements (if your clients include retail clients).
• This is not an exhaustive list of your obligations. You must comply with the conditions of your licence as well
as the Corporations Act 2001.
• Depending on your circumstances, you may be eligible for class order relief or individual relief for some
obligations.
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Licensee Obligations - Summary
• AFS licensees must:
• Comply with the Corporations Act and Regulations
• Comply with the financial services laws
• Meet its AFS licence obligations
• Comply with the International Accounting Standards
• File FS 71/71 Annual Audit Report
• Consider limited AFSL exemption
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Financial Product
General definition of financial product
CORPORATIONS ACT 2001 - SECT 763A
For the purposes of Chapter 7, a financial product is a facility through
which, or through the acquisition of which, a person does one or more of
the following:
• Makes a financial investment (section 763B)
• Manages a financial risk (section 763C)
• Makes non cash payments (section 763D)
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Financial Product
• Examples of deemed financial products
• Securities – shares, derivatives, debentures
• Interests in managed investment schemes
• Contracts of insurance ( life and general)
• Superannuation
• Retirement savings
• Basic deposit products
• Non cash payment facilities
• Australian carbon credit unit
• Margin lending – why? (background)
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Financial Product
• Examples of what is NOT a financial products
• Health insurance
• Certain credit facilities
• Reinsurance
• State insurance
• Surety Bonds
• Funeral benefits
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Financial Product Advice
• A recommendation or a statement of opinion, or a report of either of those
things, constitutes financial product advice under s766B if:
a) it is intended to influence a person or persons in making a decision about a particular
financial product or class of financial products, or an interest in a particular financial
product or class of financial products, or could reasonably be regarded as being intended
to have such an influence; and
b) it is not exempted from the definition of ‘financial product advice’.
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Financial Product Advice
• Recap
• A recommendation or a statement of opinion or a report of either of those things that is
intended to influence a person or persons in making a decision in relation to a particular
financial product or class of financial product, or could reasonably be regarded as being
intended to have such an influence.
• Note: it does not say consumer and it is not restricted to a decision to purchase or acquire or
invest.
• Advice may also be given when it is given licensee to licensee and licensee to
potential authorised representatives.
• Can only be general or personal advice (s766B(2))
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Personal Advice Vs General Advice
• Personal advice
• is financial product advice that is given or directed to a person (including by
electronic means) in circumstances where:
• the provider of the advice has considered one or more of the person’s objectives, financial
situation and needs (otherwise than for the purposes of compliance with the Anti-Money
Laundering and Counter-Terrorism Financing Act 2006 or with regulations, or AML/CTF Rules,
under that Act); or
• a reasonable person might expect the provider to have considered one or more of those
matters (s766B(3)).
• General advice
• is financial product advice that is not personal advice (s766B(4)).
Recent Consultations and developments
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General Advice
• Therefore general advice:
• Is everything that is not factual or personal advice
• Is generic to the product and not specific to the person
• Does not take into account the objectives, needs or financial situation of the
recipient
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Factual Information and Financial
Product Advice
• If a communication is a recommendation or a statement of opinion, or a report of either of those things, that is intended
to, or can reasonably be regarded as being intended to, influence a client in making a decision about a particular financial
product or class of financial product (or an interest in either of these), it is financial product advice. Communications that
consist only of factual information (i.e. objectively ascertainable information whose truth or accuracy cannot be
reasonably questioned) will generally not involve the expression of opinion or recommendation and will not, therefore,
constitute financial product advice.
• However, in some circumstances, a communication that consists only of factual information may amount to financial
product advice. Where factual information is presented in a manner that may reasonably be regarded as suggesting or
implying a recommendation to buy, sell or hold a particular financial product or class of financial products, the
communication may constitute financial product advice (e.g. where the features of two financial products are described in
such a manner as to suggest that one compares more favourably than the other).
• ASIC’s View (RG 36) : We will not treat factual information given by you as general or personal advice if:
• (a) you clarify at the outset that you are giving the client factual information where there is a reasonable likelihood of doubt; and
• (b) the information is not intended to imply any recommendation or opinion about a financial product.
Source RG36
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Advice Delivery
Advice can be given:
- in writing
- by telephone
- by fax
- over the internet
- by email
- in a public forum ( 20+ people)
- at a trade display or convention
- one on one meeting
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Disclosure Documents
• Financial Services Guide (FSG)
• About the service received
• Product Disclosure statement (PDS)
• About the product
• Statement of Advice (SOA)
• About the Advice – documenting the advice
• Also consider
• Incorporating By Reference (IBR)
• Record of Advice (ROA)
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Financial Services Guide (FSG)
• Name and contact details for providing entity
• Statement of how member can provide instructions
• Information about the authorised financial services/products
• Information about who the providing entity acts for
• Information about remuneration, commission or other benefits that the providing entity, related
body corporate, directors, employees and certain others will receive and how it will be calculated
• Associations between the providing entity and others that can influence the authorised services
• Information about the consumer dispute resolution system
• The AFS licence details
• Licensee/ Authorised Representative Remuneration
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Statement of Advice (SOA)
• Must be provided when, or as soon as practicable after, the advice is provided
(Sec 946C). The SOA must be in writing and needs to contain the following:
• Information about the basis for the advice
• Warning about the information on which the advice is based
• The name and contact details of the entity providing the advice
• The Remuneration disclosure in dollars (Reg 7.7.10A)
• The Information about the interests and associations of the providing entity that may
influence the advice being provided
• Consider Time critical cases – provision of SOA -
• I.e. client express instruction requiring further financial services
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Product Disclosure Statement (PDS)
• When there is an offer to sell a financial product a PDS must be
provided to retail clients before the client becomes legally bound.
• The PDS must be “worded and presented clearly, concisely and
effectively”.
• PDS must also contain “any other information that might reasonably
be expected to have a material influence” on a decision
• The PDS is the document of the product issuer
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Retail Vs Wholesale clients
Retail Clients - Dealing with retail clients
• Personal Advice For retail clients
• Requires an FSG
• Requires an SOA
• Requires a PDS if the advice relates to the acquisition or possible acquisition of a
particular financial product
• General Advice For retail clients
• Requires an FSG
• Requires a general advice warning to the given
• Requires a PDS if the advice relates to the acquisition or possible acquisition of a
particular financial product
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Retail Vs Wholesale clients
• Wholesale clients & sophisticated investors
• ThresholdsThe Corporations Regulations prescribe the asset and income criteria which must be met before
you can issue a certificate. A person is only eligible to be the subject of a certificate if they have:
• a gross income of $250,000 or more per annum in each of the previous two years or
• net assets of at least $2.5 million (reg 6D.2.03 and reg 7.1.28).
• LIMTED obligations to provide advice and disclosure documents (eg. no requirement to provide
and SOA to a wholesale client)
• Rationale:
• The rationale is that people meeting one of these criteria are more likely to be able to evaluate offers of
securities and some financial products (such as interests in managed investment schemes) without needing
the protections of a regulated disclosure document.
Source: ASIC
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Wholesale clients
Product test: financial product/service > $500,000.
Professional investor test: i.e. AFSL, APRA regulated bodies, trustees of public superannuation funds,
persons controlling >= $10 million and the trustee of a superannuation fund with net assets >= $10 million.
Small business test: the consumer of the financial products or services is a business which is not a small
business (non-manufacturing business > 20 employees or a manufacturing business with more than 100
employees).
Individual wealth test: The monetary (currently unindexed) thresholds are set at $2.5 million in net assets, or
gross income for each of the last two financial years of at least $250,000 per annum. Most commonly used
This test requires a current certificate from a qualified accountant certifying net asset or gross income level
The certificate is valid for two years
Sophisticated investor test: Investors with experience or professional training may wish to be treated as
wholesale investors to access wholesale investor status and wholesale-only products
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Wholesale clients Certificate
• Certificates issued by a qualified accountant
• A person holding such a certificate is a:
• ‘sophisticated investor’ for the purposes of Chapter 6D (if they are offered debt or
shares) or
• ‘wholesale client’ for the purposes of Chapter 7 (if they are offered a financial
product, other than insurance, superannuation or a retirement savings account
product or service) and the financial product is not used in connection with a
business.
• Currency of certificates - Under Chapters 6D and 7 certificates are now
valid for up to two years after they were issued.
Source: ASIC
Recent Consultations and developments
Wholesale clients – Statistics & Recent discussions
• The number of Australians who meet the wholesale investor wealth test has increased from 1.9 per cent
of the population in 2002 to more than 16 per cent. The modelling has found 1.09 million households (or
3.25 million individuals) have at least $2.5 million in assets or annual income exceeding $250,000. In 2002,
when the rule was implemented, just 104,000 households were eligible to be accredited as wholesale by
an accountant. Source AFR
• FSC
• ALRC
• Quality of advice review
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Robo Advice
• Digital disruption
• 'ASIC is keen to see a healthy and vibrant digital advice sector. We see
digital advice as having the potential to offer Australian consumers
access to good quality, low-cost, financial advice.' ASIC Commissioner
43
Robo Advice – RG 255
• Digital disruption
• RG 255 Providing digital financial product advice to retail clients
Digital advice (also known as ‘robo-advice’ or ‘automated advice’) is the provision of
automated financial product advice using algorithms and technology and without the
direct involvement of a human adviser. It can comprise general or personal advice, and
range from advice that is narrow in scope (e.g. advice about portfolio construction) to a
comprehensive financial plan. Source: ASIC
Questions