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Financial services providers

During a two year transition period, licensing of financial services providers will transfer from diverse arrangements to a single framework.

This page outlines the licensing and disclosure arrangements during the transitional period. It is in the areas of financial product disclosure and the licensing of financial services providers that the effects of FSR are most apparent to financial services providers and retail investors.

For financial services providers who were operating under the pre-FSR regime, FSR provides for the transition of diverse licensing arrangements, services and products to the FSR framework over a two year period from 11 March 2002. While appealingly simple in principle, the reality is proving to be challenging, especially when businesses undergo the process of actually moving from their pre-FSR status to FSR. 

• Licensing
  • Who has the benefit of licensing transition?
  • When does the transitional period end?
  • Other licensing transitional arrangements
• Product disclosure
  • Pre-FSR products
  • Financial Services Guides (FSGs)
  • Various

Main text last updated March 2003; footnotes only last updated February 2004. Note transition ended on 10 March 2004.

Licensing 

In summary, during the transitional period, financial services providers who operated under the pre-FSR framework can continue to operate under their pre-FSR regimes until a trigger event occurs.  However, the hawking restrictions introduced under FSR started to apply from 11 March 2002.

Who has the benefit of licensing transition?

The following financial services providers can rely on the transitional period (called 'regulated principals'): 

• Holders of a:
  • dealers licence;
  • investment advisers licence;
  • futures brokers licence; and 
  • futures advisers licence,
  under the pre-FSR Corporations Act. 
• Insurance brokers and foreign insurance agents already registered under the Insurance (Agents and Brokers) Act, when FSR started.
• Foreign exchange dealers already holding a general authority under the Banking (Foreign Exchange) Regulations, when FSR started.
• Bodies regulated by the Australian Prudential Regulatory Authority (APRA) (including an insurer within the meaning of the Insurance (Agent and Brokers) Act). 
• People who carried on a business which was not regulated before 11 March 2002 but which requires a licence under FSR. 
• People who conduct an exempt stock market or exempt futures market under a declaration made for the pre-FSR Corporations Act. 
• Solicitors¹ or accountants² giving investment advice which is incidental to their profession.
• People who carry on an activity which was the subject of an exemption under the pre-FSR Corporations Act or other relevant pre-FSR legislation but which requires a licence under FSR. 

Generally, licensing transition only applies to the extent of the person's business under their pre-FSR regime. For example, the holder of a dealer's licence allowing the licensee to operate specified managed investment schemes could not rely on the licensing transitional arrangements to start operating another one after 11 March 2002.

There are supporting provisions for representatives of regulated principals.

When does the transitional period end?

FSR does not apply to these financial services providers until:

• the two year transition period expires; 
• the financial services provider is granted an Australian Financial Services Licence (AFSL) (or is exempted from the requirement to obtain one); or
• the financial services provider ceases to have the status that meant the transitional arrangements applied to them - for example holding a licence, registration, approval, carrying on particular activities. 

It is possible to obtain an AFSL in relation to some regulated activities while continuing to rely on transition for others.

Other licensing transitional arrangements 

1. Streamlined licensing procedure 
   
   As well as providing for a gradual transition to the FSR regime, the transitional provisions also include a streamlined licensing procedure which is available to financial services providers who were already subject to a consumer protection licensing regime under the pre-FSR framework. This does not include those which were prudentially regulated (ie by APRA) or who were not regulated at all before the start of FSR.
   
   The streamlined process provides for the automatic issue of an AFSL by ASIC. It also requires the applicant to state that it will comply with its obligations as a financial services licensee, a requirement which is intended to ensure that the applicant is aware that its AFSL will subject it to obligations different from those imposed by its pre-FSR licence. Streamlining is available to: 
   
   • dealer licensees; 
   • investment adviser licensees; 
   • futures broker licensees; 
   • futures adviser licensees; and  
   • registered insurance brokers. 
   It is only available, in summary, where the licensee is of good standing. The Regulations permit an applicant for an AFSL under the streamlining process to request that its scope of activities extend beyond those permitted under its pre-FSR licence. Also, ASIC allows a composite assessment which allows streamlining of current authorisations and the ability to apply for variations. This is important because in practice it will quite often be the case that only some of your services are strictly covered by a pre-FSR licence.

    

2. Qualified licences for multi-agents 

   Qualified licences are available during the two year transition period for insurance agents who at the start of FSR represented more than one principal but who, under FSR, wish to provide financial services as principals rather than agents.

   The qualified licence will expire at the end of the two year period and the holder will then need to apply for an AFSL. The licence is designed to give agents who wish to become principals time to meet the competency requirements imposed on licensees.

   The qualified licences are limited to dealing and providing financial advice in relation to risk insurance and investment life insurance products only and cannot be extended to cover other products.

   To find out more about FSR licensing issues specific to the insurance industry, go to our insurance section.

3. Various 

The Regulations contain many complex and specific provisions to deal with transition anomalies to do with, for example: client's money and other property; related reporting requirements; financial statements and audit reports.

Product disclosure 

Pre-FSR products 

The transition arrangements allow a product issuer to lodge notices with ASIC during the two year transition period specifying a product (or a class of product) it had on issue before FSR.  In the meantime, in summary, the relevant pre-FSR disclosure regime continues to apply.  After a notice is lodged, disclosure for the product must then be made complying with FSR (from a date which must also be specified in the notice). There is a limited right to vary notices. The timing of notices need not be linked to when an issuer obtains an AFSL.

The Regulations provide descriptions of when financial products can be considered to be in the same class and ASIC has issued a class order clarifying the scope of the Regulations.

Some requirements relating to disclosure are not subject to transition, for example the new rules on:

• cooling-off;
• application money; and
• transaction confirmations.

Financial Services Guides (FSGs) 

The Regulations include provisions designed to reduce the need for regulated principals who obtain an AFSL having to provide FSGs to their pre-FSR clients or allowing them more time to do so. These are quite limited.

There are also some additional content requirements for an FSG where a person is effectively operating under both transition and FSR.

Various 

As with licensing transition, there are many (many) Regulations designed to deal with transition anomalies.

References

1. In December 2003, the Corporations Regulations were amended to ensure that the provision of legal advice by lawyers is not captured by the rules relating to financial product or service advice (regulations 7.1.35A and 7.1.40(g)).
2. In May 2003, amending regulations were made (which received assent on 12 June 2003 – refer to our Breaking News item for 12 June for details) which included an amendment to regulation 7.1.29. This amendment expanded significantly the rules governing which activities would be taken not to be a financial service, particularly in relation to the activities of 'recognised accountants'. The new regulation extended to specific auditing functions, superannuation and tax advice in some circumstances, risk mitigation, business administration, shelf companies and trusts, and credit facilities. In February 2004, regulation 7.1.29 was further amended to exempt recommendations from 'recognised accountant' that a person acquire or dispose of a self–managed superannuation product from being considered as providing a financial service under FSR. Also, under the February 2004 regulations, the scope of the exemption for risk mitigation advice was expanded to a wider class of people than just business clients (ie, to include private individuals also).