Allens

Financial Services Regulation

Our report - ASIC's views on FSR implementation (2003)

We set out below a summary of the 'ASIC Speaks' Seminar on the Financial Services Reform Act (FSRA) held in Sydney on Tuesday, 18 February 2003.

This summary only reflects ASIC's views on these various issues as expressed at the seminar. Before relying on some of the statements in this summary, you may want to seek legal advice.

Speakers

The speakers at the seminar were as follows.

  • Ian Johnston — Executive Director of FSR
  • Pauline Vamos — Licensing
  • Mark Adams — Legal & Technical
  • Sean Hughes — Regulatory & Compliance (surveillance)

General

(a) ASIC is not expecting that the government will grant an extension to the transition period.

(b) ASIC does not believe there will be any further significant changes to the law before the end of the transition period.

(c) The government is currently consulting with various industry bodies regarding the compensation regime under the FSRA. The government is expected to issue a second consulting paper on the compensation regime shortly.

(d) ASIC noted that PS146 ('Licensing; Training of financial product advisers') has recently been amended.

(e) ASIC has recently issued a policy proposal paper regarding adviser conduct and disclosure obligations. Once settled, this policy will replace PS121 ('Investment advisory services: retail investor protection requirements') and PS122 ('Investment advisory services: the conduct of business rules (s849 and s851)'). The policy proposal paper covers what constitutes personal advice, remuneration/conflicts disclosure and giving appropriate advice. ASIC is also doing further work on the draft regulations in this area which will cover, amongst other things, what are exempt documents and what is a public forum.

(f) ASIC has recently established an electronic format for making relief applications in the FSRA area and has requested that this is used where possible. This can be accessed at fsr.applications.amanager@asic.gov.au. [will provide link for this in accompanying email]

(g) ASIC noted that, except for the Australian Financial Services Licences (AFSL) issued to responsible entities, there is no materiality test (such as a material adverse effect on investors' interests) for the obligation to notify ASIC of a breach under section 912A or section 912B of the Corporations Act. ASIC is currently working with industry bodies to consider whether a materiality test should be introduced. ASIC also noted that it was looking at electronic breach reporting.

(h) ASIC stated that for a breach of a dealers licence which only came to the relevant licensee's attention after the licensee had transitioned to an AFSL, there did not appear to be any obligation to notify ASIC of this breach (provided, of course, that notification was not required under the new AFSL).

(i) ASIC is currently working with various industry groups (including IFSA) to establish a template, and hopefully an industry standard, for fee disclosure.

(j) ASIC noted that if a product referred to benchmarks which the issuer/manager was trying to obtain, then past performance may need to be included in the Product Disclosure Statement.

Licensing

(k) ASIC has said that all transitioning licence applications should be received by no later than 1 December 2003 in order to be processed by the end of the transition period.

(l) More new licence applications have been received than transitioning licence applications. In general, some sectors have been making their licence applications earlier, such as those working in the wholesale area. To date, no conglomerates have lodged a licence application.

(m) ASIC's targets are to consider:

(i) 70% of full licence applications within 10 days;

(ii) 70% of composite licence applications within six days; and

(iii) 70% of streamlined licence applications within three days.

Currently ASIC is not quite reaching the 70% target for full licence applications, but is exceeding the target for the latter two categories.

(n) When relying on alternative five from PS164 ('Licensing: Organisational capacities') to establish that a responsible officer has the necessary knowledge, ASIC requires specific details of the relevant person's experience including, if relevant, specific details of the role the person fulfilled and the work the person undertook at the time they held a proper authority.

(o) ASIC's view is that many of the licence applications received to date have not been of a good quality. In particular, ASIC mentioned that the cashflow documents included with licence applications had sometimes failed to take into account all expenses or had not been signed.

(p) ASIC intends to provide further clarification (by way of a FAQ or guidance paper etc) regarding the documents on which a licensee must include its licence number. ASIC also referred to the draft regulation on this issue.

(q) ASIC has established specialised teams to deal with various different types of licence applications. Licence applications by conglomerates, responsible entities and people who are dealing with the wholesale end of town will generally be dealt with in Sydney. Financial planners and superannuation trustees will generally be dealt with in Melbourne. Western Australia and Queensland may also deal with licence applications by financial planners.

(r) During the last three months of the transition period, priority will be given to licence applications received from transitioning licensees. Brand new licence applications and applications for variations of licences will not receive priority during this time.

(s) Existing securities dealers may have the benefit of streamlining for new services (even though these services were not previously regulated).

(t) Applicants for licences may need to provide templates of Financial Services Guides, Statements of Advice and Product Disclosure Statements at the time of making their licence applications.

Conglomerates

(u) To date, no conglomerates have lodged a licence application.

(v) ASIC's preference is to have the core group of companies which make up a conglomerate apply for their licence/licences at the same time.

(w) Conglomerates are asked to let ASIC know when they are planning to lodge their licence application by contacting Ian Podmore.

(x) All licence applications for conglomerates will be done in Sydney by a specialist team. An account executive will be appointed to each conglomerate.

(y) ASIC considers that the FSRA licensing regime provides the flexibility that conglomerates need because a company which holds a licence can appoint other companies as its authorised representatives. The only limitation on this is that an authorised representative cannot act as principal. ASIC has issued some guidance on the factors which it considers determine whether an authorised representative is acting as principal or agent. ASIC noted that it is open to global group supervision systems provided that if supervision is outsourced then the licensee must monitor and supervise the outsourcing. ASIC also noted that adequate disclosure needs to be made of who holds the licence.

Verification surveillance visits by ASIC

(z) ASIC has undertaken some verification surveillance to check that licensees are acting in accordance with the information contained in their licence applications. In the majority of cases, ASIC has found that licensees are acting in accordance with their licence applications. However, ASIC did mention that the following areas needed further work by about 30% of those visited for the verification surveillance.

(i) The maintenance of a breaches register. A breaches register must be kept even if it does not currently contain any breaches.

(ii) Internal complaint handling procedures.

(iii) Risk management procedures in view of the particular business being operated.

(aa) ASIC has said that licensees may be more likely to receive a verification surveillance visit from ASIC if their licence application comes in very late.

Mutual discretionary funds

(bb) ASIC's view is that mutual discretionary funds are likely to be financial products. ASIC considers that these mutual discretionary funds may be managed investment schemes which need to comply with Chapter 5C of the Corporations Act unless relief is obtained. ASIC will shortly be issuing some guidance on this.

Foreign financial service providers

(cc) In respect of foreign financial service providers, ASIC has issued a FAQ and a policy proposal paper. In brief, ASIC expects that its final policy will be that provided the foreign financial service provider is subject to "sufficient regulatory equivalence" as the Australian system, then ASIC will probably grant relief so that these entities do not have to hold an AFSL.

Managed discretionary accounts

(dd) ASIC expects to issue a policy proposal paper on managed discretionary accounts in March of this year. ASIC expects to offer these managed discretionary accounts a tailored regime with some class order relief from Chapter 5C.

ASIC's compliance campaigns – managed investment schemes

(ee) ASIC noted that some of its recent compliance campaigns concerned agricultural schemes (where ASIC considered that the commissions were particularly high), wealth creation seminars and financial institutions which used their internal advisors to promote their own products.

(ff) ASIC is currently also running a campaign on compliance committees and noted that it was concerned with low levels of breach notification reporting by compliance committees. ASIC is also proposing to review the extent of reporting of breaches by licensees' auditors. ASIC is concerned that the level of reporting is not always consistent between auditors.

ASIC's compliance campaigns – superannuation

(gg) In terms of superannuation, ASIC is currently conducting campaigns on ERFs and complaints handling. The reports for the ERF campaign and the complaints handling campaign are expected to be issued shortly. The ERF campaign was particularly focussed on disclosure by ERFs, disclosure by funds that mass transfer into ERFs and consideration of compliance processes.

(hh) ASIC is shortly proposing to launch a campaign on negative elections, particularly insurance opt out arrangements. ASIC is particularly concerned that disclosure needs to be clear and effective. 

(ii) ASIC is currently undertaking a joint review with APRA on unit pricing in superannuation funds. ASIC has identified deficiencies in systems and risk management procedures. ASIC and APRA may run more joint campaigns in the future.