Compliance: Theory and Practice in the Financial Services Industry

8A. Retail Customer Obligations

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Outline

	Retail vs Wholesale Customers
	Personal vs General Advice
	Financial Services Guides
	Statements of Advice
	Know Your Client/Product
	Warning Obligations
	Dispute Resolution Systems
	Compensation Arrangements
	Consequences of Breach

For general guidance on the matters covered in this lecture, see ASIC Regulatory Guide 175 Licensing: Financial product advisers – conduct and disclosure.

Retail vs Wholesale Customers

CA s761G(2) provides that a person to whom a financial product or financial service is provided as a retail client is taken to acquire the product or service as a retail client. CA s761G(3) provides that if a financial product is provided to a person as a retail client, any subsequent disposal of all or part of that product by the person is a disposal by the person as a retail client.

These rules do not apply to general insurance, superannuation or RSA products or traditional trustee company services, which have their own special rules - see below.

In a prosecution for an offence against Chapter 7, the defendant bears the evidential burden of producing evidence to show an investor was a wholesale investor within paragraphs (a)-(d) above (s761G(8)).

In any non-criminal proceedings under Chapter 7 relating to a product or service provided to a person to which s761G(7) applies, there is a rebuttable presumption that the person is a retail investor (s761G(9)).

CR rr7.1.18 – 7.1.26 contain rules for valuing different types of products for the purposes of the threshold mentioned in (a) above. Those rules differ, depending on whether the product is an investment based product, income steam product, margin lending facility, derivative, foreign exchange contract, non-cash payment product, or life insurance or other risk based product.

Note that (a) above does not apply to risk-based financial products (r7.1.25) - ie financial products under s763C (general products by which a person manages financial risk, other than derivatives) or life risk insurance products (r1.0.02).

CR r7.1.27 provides that if at any time the holder of a financial product is a wholesale client in relation to the product because of s761G(7)(a) (ie an investment > $500,000), the holder is taken, on and after that time, to be a wholesale client in relation to the product as between the holder and the issuer of that product and any related body corporate of the issuer that provides a custodial or depository service to the holder in relation to the product for the duration of the period the holder holds that product. This is so even if the holder would have otherwise been or become a retail client in relation to that product at some time. Further, if someone else becomes the holder of the product and the issuer does not know, and could not reasonably be expected to have known: (i) whether another person had become the holder of the financial product; or (ii) whether any subsequent holder of the financial product was a retail client or a wholesale client, the issuer is taken not to be guilty of any offence, or to be liable under civil penalty or civil liability provisions under the Act, merely because the issuer has not treated any subsequent holder of that financial product as a retail client.

There is a definition of superannuation-sourced money in r1.0.02. This requires that the financial service provider know or ought reasonably to know that the money will be or has within the last 6 months been paid out as an ETP or superannuation lump sum by the trustee of a regulated superannuation fund.

Paragraph (c) above is often referred to as the "wealthy investor exclusion". See ASIC Regulatory Guide 154 Certificate by a qualified accountant and Class Order 04/173 for guidance on which accountants are qualified to provide the certificates referred to in that paragraph.

Note also CR r7.6.02AC, which adds new ss761G(7A) and (7B) providing that in determining the net assets or gross income of a person under s761G(7)(c), the net assets or gross income (as applicable) of a company or trust controlled by the person may be included. For these purposes, "control" is defined in CA s50AA.

Note the reference in (c) to the Financial Corporations Act 1974 appears to be a drafting error. That Act was repealed in 2001 by the Financial Sector (Collection of Data - Consequential and Transitional Provisions) Act 2001 with effect on 1 July 2002. Under the latter Act, the Register of Corporations that was kept by the Reserve Bank under s9(9) of the Financial Corporations Act 1974 was continued in existence as the Register of Entities kept by APRA under s8 of the Financial Sector (Collection of Data) Act 2001. The corporations that were previously registered under the Financial Corporations Act are now known collectively as Registered Financial Corporations ("RFCs").

Thus, the $500K+ and wealthy and sophisticated investor exclusions do not apply to the types of general insurance products mentioned in (b) above.

CR rr7.1.11 – 7.1.17 contain definitions of the different types of policies referred to in (b) above. CR r7.1.17A prescribes medical indemnity insurance for the purposes of (b) above.

Thus, again, the $500K+ and wealthy and sophisticated investor exclusions do not apply to superannuation or RSA products.

CR r7.1.17C provides that a traditional trustee company service is not provided to a person as a retail client if: (a) the service is provided to the person for use in relation to a business that is not a small business; or (b) the person to whom the service is provided is a professional investor.

CR r7.1.19(6) provides that the above regulation does not affect the operation of Part 7.9 of the Act and Regulations, to the extent that they require the provision of a PDS in relation to financial product advice. Hence, in any situation in which a PDS would be required for a retail client, the $500,000 limit must be reached for a single investment-based financial product or income stream financial product before the client will be treated as a wholesale client and therefore not require a PDS for that product.

This regulation was added by the Corporations Amendment Regulations 2003 (No. 10) 2003 and was designed to improve the practical operation of the $500K 'price-value' test by allowing the aggregation of investment amounts from connected entities. Prior to this regulation, difficulties could arise where a person made an overall investment of $500K at the same time but through different entities for accounting, legal, tax or other reasons. Even though the person invested $500K overall, these investments individually would not meet the required threshold for being treated as a wholesale client. This regulation now allows the aggregation of related transactions at or around the same time for the purpose of determining whether the price or value of a financial service exceeds the threshold for a wholesale client.

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Personal vs General Advice

Note that the Corporations Act does not specify any form requirements for financial product advice. Hence financial product advice may be advice that is given orally, electronically or in writing.

CA s766B(1A) provides that the provision or giving of an exempt document or statement does not constitute the provision of financial product advice.

Exempt document or statement means a document prepared or a statement given in accordance with the requirements of Chapter 7 - other than a Statement of Advice (SOA) or something defined not to be an exempt document or statement in the Regulations (s766B(9)(a)). So giving someone an Financial Services Guide (FSG) or Product Disclosure Statement (PDS), being 2 of the documents that are required to be given under Chapter 7, in and of itself would not be giving financial product advice. That position is modified somewhat, however, by r7.1.08(1), which carves out of the definition of exempt document a PDS that contains personal advice or general advice about a financial product other than the financial product to which the PDS relates and an FSG that contains personal advice. Also carved out are records of further market-related advice under s946B(3A) and advertisements and other promotional materials for financial products under s1018A.

Exempt document also includes anything that is prescribed to be an exempt document or statement in the Regulations (s766B(9)(b)). Reg 7.1.08(3) provides that documents, information and statements that (a) do not contain personal advice; (b) are required by, and prepared as a result of, a requirement under an Australian law; and (c) are included in a class of documents, information or statements specified by ASIC in a list published in the Gazette, are prescribed (and so included in the definition). CR r7.1.08(4) provides that assessments under s985E(1) that a margin lending facility, or an increased limit for a margin facility, will not be unsuitable for a client are similarly prescribed (and so included in the definition - although r7.1.08(4) incorrectly refers to them being excluded from the definition).

Note that s766B(1A) does apply to a recommendation or statement of opinion made by an outside expert, or a report of such a recommendation or statement of opinion, that is included in an exempt document or statement - this can still be financial product advice provided by the outside expert even though it may be contained in an exempt document or statement (CA s766(1B)).

CA s766B(5) provides that: (a) advice given by a lawyer in his or her professional capacity, about matters of law, legal interpretation or the application of the law to any facts; (b) except as may be prescribed by the regulations, any other advice given by a lawyer in the ordinary course of activities as a lawyer, that is reasonably regarded as a necessary part of those activities; and (c) except as may be prescribed by the regulations, advice given by a tax agent registered under Part VIIA of the Income Tax Assessment Act 1936, that is given in the ordinary course of activities as such an agent and that is reasonably regarded as a necessary part of those activities, is not financial product advice.

Limited responses to queries about the cost of, or rate of return on, a product are excluded from being financial product advice by CA ss766B(6)and (7).

There are further exemptions from the definition of financial product advice in CR rr7.1.29 - 7.1.33H.

As noted by ASIC in Regulatory Guide 175 Licensing: Financial product advisers – conduct and disclosure, an adviser need not consider all aspects of the client’s relevant personal circumstances (ie the client’s objectives, financial situation and needs) for the advice to be personal advice. It is enough that either: (a) at least one aspect of the client’s relevant personal circumstances was actually considered; or (b) regardless of whether they were in fact considered, a reasonable person might expect the adviser to have considered at least one aspect of the client’s relevant personal circumstances (RG 175.30).

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Financial Services Guides

In the case of an authorised representative, the relevant licensee must have authorised the distribution of the FSG by the representative (s941B(2)).

The sections referred to in the second bullet point are those requiring disclosure in an FSG of information about remuneration, associations and insurance binders.

For these purposes, "time critical" means: (a) the client expressly instructs that they require the financial service to be provided immediately or by a specified time; and (b) it is not reasonably practicable to give an FSG to the client before the service is provided as so instructed.

ASIC has issued Class Order CO 04/1055, Information in a Financial Services Guide given in a time critical situation, to facilitate the provision of FSGs in time critical situations. As the Corporations Act requires an FSG to be up to date at the time it is given to the client, the information in the FSG provided later may contain different information to an FSG that would be given in normal circumstances. To reduce the potential for a significantly increased compliance burden in having to provide customised information in an FSG, the class order provides that information in an FSG given in a time critical situation need only be up to date as at the time the earlier statement was given to a retail client.

In relation to (g), where an FSG includes such a statement and the client is provided with further advice, the licensee must comply with a request made in accordance with that statement for a record of that advice (s942B(8) and r7.7.10AC(2)). CR r7.7.05 prescribes as the period within which a client may request a record of further advice as 7 years after the day on which the advice is provided.

In relation to (j), a "binder" is an arrangement that allows an insurance broker or agent to enter into insurance policies or to settle claims on behalf of the insurer (s761A).

In relation to (k), r7.7.03A requires an FSG given by financial services licensee to include a statement about the kind of compensation arrangements that the licensee has in place for clients and whether those arrangements satisfy the requirements of s912B. This was added by Corporations Amendment Regulations 2007 (No 6) SR 197/2007. The Explanatory Statement for those regulations said that: "It is expected that the statement will be in general terms - for example, it may refer to professional indemnity insurance without necessarily providing details of the cover."

In relation to (h), again, where an FSG includes such a statement and the client is provided with further advice, the authorised representative must comply with a request made in accordance with that statement for a record of that advice (s942C(8) and r7.7.10AD(2)). CR r7.7.08 prescribes as the period within which a client may request a record of further market-related advice as 7 years after the day on which the advice is provided.

In relation to (m), the FSG must include the licence number of the licensee for whom the authorised representative acts (CR r7.7.06A) and, unless CR r7.7.05B applies (see below), the authorised representative number allocated by ASIC to the authorised representative (CR r7.7.05A).

Regulation r7.7.06B requires an FSG given by an authorised representative of a financial services licensee to include a statement about the kind of compensation arrangements that the licensee has in place for clients and whether those arrangements satisfy the requirements of s912B.

CR r7.7.05B allows the use of "anonymised" FSGs in certain circumstances by individuals who are authorised representatives of corporate licensees or corporate authorised representatives. Under that regulation, an FSG is not required to include the name and contact details of the individual if: (a) the financial service is dealing in a financial product or the provision of general advice or both; (b) the individual provides the financial service in accordance with the authorisation; (c) the licensee has reasonable grounds to believe that the identity or remuneration of the individual would not be material to a decision by a retail client whether or not to obtain the financial service; and (d) the FSG includes the contact details and licence number of the licensee and a statement setting out, in general terms, the individual's role and capacity in providing the financial service.

Where the client requests particulars under the last bullet point, to the extent relevant, those particulars must include a statement of the range of amounts or rates of benefit eg 'remuneration is paid within the range of $X to $Y' or 'commission is paid at rates between X% and Y%' (r7.7.04A and 7.7.07A).

The problem with these regulations is that, taken literally, they require FSGs to include specific additional information about benefits, even where the information is not relevant to the financial services that will be or are likely to be provided to the client receiving the FSG or the benefits relate solely to services for which an FSG would not be required. ASIC has granted relief under Class Order CO 05/27 to redress this. The Class Order exempts financial service providers from including any additional remuneration information required by rr7.7.04 and 7.7.07 in a FSG, where the information does not relate to a financial service that will be or is likely to be provided to the client or the information relates exclusively to services which do not require the provision of a FSG (e.g. if the service is provided only to wholesale clients). However, if the providing entity later provides another financial service to a retail client and the additional remuneration disclosures have not previously been made to the client in an FSG because of the relief in Class Order, the providing entity is required to give the client a new FSG or supplementary FSG including the relevant additional remuneration disclosures for that financial service.

In describing the purpose and content of the FSG, the client's attention must be drawn to the fact that it: (a) is designed to assist the client in deciding whether to use any of the services offered in the FSG; (b) contains information about remuneration that may be paid to the licensee/representative and other relevant persons in relation to the services offered; and (c) contains information on how complaints against the licensee/representative are dealt with (rr7.7.03(2) and 7.7.06(2)).

To be displayed prominently, the statement about the purpose and content of the FSG must appear at, or close to, the front of the FSG (ideally on the inside front cover or facing page) and stand out from the other information contained in the FSG (rr7.7.03(6) and 7.7.06(6)).

Allowing 2 or more separate documents to comprise an FSG gives you the option of having a core document that won’t change often and then an addendum with information that might change more frequently.

The capacity to combine an FSG and a PDS in a single document does not apply to FHSA products, margin loans, superannuation products to which Subdivision 4.2B of Division 4 of Part 7.9 applies or simple managed investment scheme to which Subdivision 4.2C of Division 4 of Part 7.9 applies (CR r7.7.08A(1A)-(1D)). These are products for which simplified PDS requirements have been prescribed, where combining an FSG with the PDS would run counter to the policy of having a short and simple PDS.

CA s940C(5) defines what is meant by sending a document to a person at an address.

Note that if you give someone a document electronically, you must present it so that the person will be able to keep a copy of it (ie you ought to include a print function with a printer friendly version of the document) – see r7.7.01(3).

CA s940C(6) defines who can act as agent of the client for the purposes of service. It excludes a financial services licensee, an authorised representative of a financial services licensee, a person who is exempt from the requirement to hold an Australian financial services licence, a person who is required to hold an Australian financial services licence but who does not do so, and any of their employees, directors or other representatives, acting in that capacity for the client. So, for example, you cannot satisfy the requirement to give an FSG to a client by giving it to their financial planner.

There is a similar requirement in relation to Supplementary FSGs in s943F.

See also s943E, which allows a Supplementary FSG to be given to a client to add information to an earlier FSG that has been given to a client because of previous conduct.

In relation to the second bullet point, a PDS is required in lieu of an FSG.

In relation to the fourth bullet point, see r7.7.02(2), which covers things such as public lectures and seminars, television and radio broadcasts and promotional materials in newspapers and magazines. Before advice is provided in such a forum, the client must be given the information that would be required in an FSG by ss942B(2)(a), (e) and (f), or ss942C(2)(a), (c), (f) and (g), as the case requires (s941C(5)). That is, the name and contact details of the adviser and information about remuneration and associations or relationships that might affect the independence of the advice. Reg 7.7.01 requires that that information be given in the same format (orally, in writing or electronically) as the corresponding general financial product advice.

In relation to the fifth bullet point, CR r7.7.02(1) prescribes: (a) deposit products where there is no minimum period before which funds cannot be withdrawn or transferred from the facility without a reduction in the return generated for the depositor or, if there is such a period, it expires within 2 years of the date of the deposit; (b) travellers' cheques; (c) cash management trust interests; and (d) capital guaranteed FHSA products. Before advice is provided about, or the client is issued with, a product referred to in that bullet point, the client must be given the information that would be required in an FSG by ss942B(2)(a) and (h), or ss942C(2)(a) and (i), as the case requires (s941C(7)). That is, the name and contact details of the adviser and information about its dispute resolution systems.

In relation to the sixth bullet point, the requirements of ss942B(3) and (6A)/ss942C(3) and (6A) that the statement must meet are that it contains the level of information a person would reasonably require for the purpose of making a decision whether to acquire financial services from the licensee/representative as a retail client and that it is worded and presented in a clear, concise and effective manner. The statement may also contain other information to that listed (s941C(7B)(b) and r7.7.02A(2)).

Again, in relation to the sixth bullet point, in time critical situations where an FSG is not required under ss941C(7A) (ie where a client is given a PDS plus a statement setting out any other information required in an FSG), the PDS and statement required to be given under that section must be supplied within 5 business days or sooner if practicable (s941D(4), as modified by r 7.7.10AF(3)).

In relation to the last bullet point, CR rr7.7.02(3)-(7) set out other situations in which an FSG is not required.

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Statements of Advice

CA s940C, above, specifies how an SOA is to be given to a client.

An SOA and a document, or part of a document, mentioned in the SOA, must be retained by the licensee/representative that gives it for 7 years after the day on which it is provided to the client (r7.7.09C).

The SOA requirements have proven to be quite burdensome and amendments have been made to the law to allow an abridged version of an SOA, a Record of Advice or ROA, to be used in certain circumstances (see below).

The sections referred to in the second bullet point are those requiring disclosure in an SOA of information about remuneration and associations and additional disclosures where the advice in question recommends the replacement of one product with another.

For these purposes, "time critical" means: (a) the client expressly instructs that they require a further financial service that arises out of, or is connected with, the advice to be provided immediately or by a specified time; and (b) it is not reasonably practicable to give the Statement of Advice to the client before that further service is provided as so instructed.

In relation to (f), CA s945B specifies the warning that must be given if the advice is based on incomplete information.

In relation to (g) and (d)(v), CR r7.7.11 requires an SOA given by a financial services licensee to include, in a manner that is easy for the client to understand, information about all remuneration (including commission) and other benefits that a person has received, or is to receive, for referring another person to the financial services licensee.

Also in relation to (g), CR r7.7.09AA requires a licensee who provides advice to a retail client concerning margin loans to include in the SOA information in relation to the specific matters of which they are required to make reasonable enquiries under s985F(1)(c).

ASIC has provided guidance in Information Release IR 04-61 on how it expects licensees to prepare SOAs. It has also published Class Order CO 04/1556, Statements of Additional Advice, to facilitate shorter SOAs where the adviser has an ongoing relationship with the client. The class order provides relief to permit SOAs to incorporate by reference certain information that the client has already received in a previous SOA.

In relation to (h), ASIC has the power to grant relief from the requirement to state amounts in dollars (see rr7.7.11(2)-(4) and 7.7.11B). For ASIC's policy on compliance with the dollar disclosure regime, see ASIC Regulatory Guide 182 Dollar Disclosure.

Again, in relation to (g), s945B specifies the warning that must be given if the advice is based on incomplete information.

In relation to (h) and (e)(vi), r7.7.12 requires an SOA given by an authorised representative of a financial services licensee to include, in a manner that is easy for the client to understand, information about all remuneration (including commission) and other benefits that a person has received, or is to receive, for referring another person to the authorised representative or the financial services licensee.

Also in relation to (h), r7.7.09BA requires an authorised representative who provides advice to a retail client concerning margin loans to include in the SOA information in relation to the specific matters of which they are required to make reasonable enquiries under s985F(1)(c).

CR r7.7.11A requires an SOA given by an authorised representative of a financial services licensee also to include the licensee's licence number.

In relation to (i), ASIC has the power to grant relief from the requirement to state amounts in dollars (see rr7.7.12(2)-(4) and 7.7.13). For ASIC's policy on compliance with the dollar disclosure regime, see ASIC Regulatory Guide 182 Dollar Disclosure.

ASIC has published an example Statement of Advice illustrating its interpretation of clear, concise and effective advice and disclosure in a specific financial advice scenario. For a copy of the sample SOA, go to: Regulatory Guide 90 Example Statement of Advice for a limited financial advice scenario for a new client.

The Financial Planning Association has published A guide to the development of effective Statements of Advice. It has also released 4 example short form SOAs for Savings Plans, Retirement Strategies, Life Risk and Transition to Retirement. A pro forma 10 page example SOA from which these were derived was endorsed by ASIC - see ASIC Media Release 08/138.