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Funds Management

Focus: Financial Services Reform – October 2005

Release of draft FSR refinement regulations

In brief: The public has less than one month to make submissions to the Federal Government on the draft Corporations Amendment Regulations, which aim to reduce compliance costs while still ensuring that consumers receive relevant and adequate disclosure on financial products. Senior Associate Justine Woodford summarises what the regulations cover.

The Federal Government's release of the draft Corporations Amendment Regulations (the regulations) on 11 October 2005 marks the next stage in its implementation of the financial services reform (FSR) proposals contained in its Proposals Paper, Refinements to financial services regulation, which was released on 2 May 2005.

Some background

In May 2005, we reported on the release by the Federal Government of the Refinements to Financial Services Regulation – Proposals Paper (proposals paper) and in September 2005, we reported on progress by the Australian Securities and Investments Commission (ASIC) on the eight refinements projects for which it is responsible under the proposals paper. ASIC's role involves implementing the proposals through class order relief and written guidelines. The draft regulations cover the remaining 17 proposals, which require changes to the law.

The regulations

The regulations were developed after several months of public consultation and take account of comments received from consumer industry groups and industry representatives. The new regulations are aimed at facilitating the balance between ensuring that consumers receive information that is relevant to their needs and communicated clearly and effectively by financial advisers, and the need to reduce compliance costs and clarify the law for financial services providers.

Specifically, the regulations:

  • promote more effective written and oral disclosure;
  • clarify the retail/wholesale distinction that underlies the FSR regime;
  • streamline disclosure requirements where financial services are provided through intermediaries;
  • modify the definition of general advice so that some advice will not be taken to constitute the provision of a financial service;
  • define the jurisdictional scope of FSR; and
  • simplify authorisation procedures for representatives.

Below is a brief summary of each of the proposals dealt with in the regulations.

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More effective disclosure
Disclosure documents
  • Financial services guides (FSG):
    • Licensees and authorised representatives will have the option of tailoring their FSGs so that the guides need only contain information about specific financial services or products to be provided to the client.
    • Financial services providers will have the option in applicable situations to provide clients with a shorter version FSG (ie a 'statement' that does not repeat information already in a product issuer's product disclosure statement), provided that the shorter FSG and the PDS are given to the client at the same time.
    • Licensees and authorised representatives will be able to provide brief and generic information about remuneration where the amount of remuneration cannot be determined when the FSG is given to the client (although more detailed information about the range of amounts or rates of remuneration must be given to a client on request). Similarly, generic information can be provided on conflicts of interest. (Note: the proposed refinements of the law in this area set out in the proposals paper have been modified slightly in the regulations.)

  • Statements of advice (SOA):
    • Advice providers will be exempt from having to provide a client with a SOA for further advice after providing the initial SOA, where there are no 'significant' (not defined) changes in the client's personal circumstances or the basis for the advice since the last SOA was given. Instead, the provider would be required to keep a record of the subsequent advice for seven years and provide it to the client, if requested. (Note: the proposed refinements of the law in this area set out in the proposals paper have been modified slightly in the regulations.)
    • Advisers will not be required to include in a SOA information on alternative products or services that are considered, but not ultimately recommended to the client. However, where applicable, the SOA must note that they were considered (and include a general explanation of the information) and state that the client can request that alternative information (and the adviser must give a written response).

  • Product disclosure statements (PDS )

In applicable situations, product issuers will be allowed to provide a 'short-form' PDS that contains a summary of the product information that must be included in the PDS (although, for managed investment and superannuation products, full information about fees and costs (ie the enhanced fee disclosure information) must be set out in full in the short-form PDS). The short-form PDS may also refer to other information in the PDS or FSG for the product and that information will then be deemed to be included in the short-form PDS, so that investors are taken to have read it and, as a result, the relevant liability and enforcement provisions attach to this information. Also, various provisions dealing with supplementary disclosure, advertising, lodgment etc which affect the PDS will also extend to the short-form PDS. This proposal does not replace the requirement for a PDS to be prepared (in a form allowed under the Corporations Act) and to be made available to a retail client who requests it. Also, this proposed regulation does not apply to insurance products, which are covered by a separate proposal (see below). (Note: the proposed refinements of the law in this area set out in the proposals paper have been modified in the regulations.)

Oral disclosure/cooling off

Where a cooling-off period applies for an issued or recommended product and the PDS for that product can be provided at a later time subject to appropriate oral disclosure, the regulations propose that oral disclosure be limited to details of the product issuer, information about the availability of a cooling-off period, and telling the client to consider the information in the PDS that will be provided later. The client must also be asked if it wants any further information about the product (which extends beyond the original proposal set out in the proposals paper).

Basic deposit products (BDPs)

BDPs, related non-cash payment facilities and travellers' cheques will be exempt from the PDS requirements, subject to disclosure to the client about the cost of the BDP and any amounts that are or may be payable (and the timing of payments) after acquiring the BDP. The regulations also propose that a FSG and a SOA will not be required in relation to an interest in a cash management trust (which extends beyond the original proposal set out in the proposals paper).

General insurance products
  • The regulations propose that the PDS requirements for general insurance products should be tailored so that an insurer need only disclose information relevant to that type of product, including any information required to comply with obligations under the Insurance Contracts Act 1984 (Cth).
  • Originally, the proposals paper suggested that a new PDS should not be required for renewal of a general insurance product where no material changes to the policy had occurred. However, based on feedback received, the Government decided that this proposal would not sufficiently deal with the issue1 and this proposal is no longer being pursued.

However, the Government has included a new proposed regulation to give insurers the option to issue a supplementary PDS on renewal of a general insurance product for which a PDS would have been required2. The supplementary PDS would only need to disclose any changes to the insurance policy since the client received the original PDS. Clients must be informed that they can request a complete PDS (which must be provided within five business days). Also, in response to concerns raised by industry about the cost of providing personal insurance advice, the regulations propose that an adviser will not be required to provide a SOA when giving personal advice about general insurance, although they must still provide details of remuneration, commissions and conflicts of interest.

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Retail/wholesale distinction

Under the regulations:

  • assets or income of a trust or company controlled by an investor can be aggregated with the investor's own assets or income for the purposes of determining whether the investor or the controlled trust or company is a wholesale investor;
  • the test of 'professional investor' will be determined by a person controlling (current test) or having (proposed new test) a minimum of $10 milion in gross assets; and
  • accountants' certificates that certify a person's wealth or income for the purposes of the 'professional investor' test can be relied on for two years.

(Note: the proposed refinements of the law in this area set out in the proposals paper have been modified slightly in the regulations.)

Provision of secondary services

Under the regulations, a secondary service provider (SSP) that authorises an intermediary to provide a financial service to the SSP's client will be exempt from the FSG requirements in relation to that financial service where:

  • the intermediary's licence (or authorisation, as the case may be) covers the applicable service; or
  • in the case of an intermediary who is not licensed or authorised to provide the secondary service, the SSP has a written agreement with the intermediary under which the intermediary agrees to give the SSP's FSG to the client or informs the client how to obtain a copy of the FSG3.

Neither situation affects the liability of the SSP to the client in respect of the provision of the service. Also, the intermediary is still required to give its FSG to the client.

(Note: that these proposed regulations vary slightly from the proposals paper.)

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General advice

Under the regulations, general advice (ie not personal advice) provided in the following situations will not constitute providing a financial service:

  • The advice is not about a particular financial product (or interest in a particular financial product), is not (or could not reasonably be regarded as being) intended to influence another person to make a decision about a particular product (or interest), and no additional remuneration or other benefit is received by the adviser (or an associate) in relation to the giving of that advice. (This exemption has been introduced because of concerns about the potentially wide application of the definition of financial product advice that can make it difficult in some cases for licensees to have any conversations with consumers without triggering the general advice requirements. The precise scope of the proposed exclusion is specific and reasonably narrow.)
  • In relation to advice about a particular financial product (or interest in a particular financial product or class of product), the issuer: advises the person that the issuer is not licensed to provide financial product advice in relation to the product (or interest or class); recommends the person read the relevant PDS before making an investment decision; and, if applicable, notifies the person about the availability of a cooling-off period.
Jurisdictional issues

The regulations set out some scenarios that are intended to clarify the jurisdictional reach of the Australian financial services law to ensure that it does not inadvertently capture parties or transactions not intended to be caught. The proposed scenarios have, in some cases, been changed (broadened and combined) from what was included in the proposals paper, to try to simplify the rules.

Authorised representatives

The regulations propose that, subject to some advice and product-related restrictions set out in the regulations, an authorised representative (authoriser) appointed by a licensee will be permitted to 'sub-authorise' an individual to provide financial services on behalf of the licensee. For those sub-authorised individuals whose appointment is not notified to ASIC, the authoriser will be required to keep a register (which can be accessed by the public) containing information about them. (Note: the proposed refinements of the law in this area set out in the proposals paper have been modified slightly in the regulations.)

Consultation process and timetable

The Federal Government is seeking comments on the regulations, which must be submitted to Treasury by 4 November 2005. At this stage, there is no indication about when the final regulations are expected to be in place. The Government has also noted that some other more complex matters, which have been raised during the proposed refinements consultation process but which are beyond the scope of the refinements project, will be considered separately, with input from the Business Regulation Advisory Group.4

We will keep you informed. In the meantime, if you have any FSR-related queries, please contact one of our FSR experts below.

Footnotes
  1. Explanatory Memorandum for Draft Corporations Amendment Regulations (Refinements to Financial Services Regulation) (October 2005), at page 16.
  2. It is not entirely clear from the regulations (nor the Explanatory Memorandum) when that would be the case.
  3. Refer to the proposals paper (page 22) for a further explanation and examples of how this might work in practice.
  4. The Business Advisory Group was established in mid-1997 to provide high-level feedback from community representatives on various aspects of the Government's Corporate Law Economic Reform Program.

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