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
   Acting in the Client's Best Interests
   Conflicted Remuneration
   Ongoing Fee Requirements
   Warning Obligations
   Dispute Resolution Systems
   Compensation Arrangements
   Consequences of Breach

 


Retail vs Wholesale Customers

General Rules
•     A financial product or a financial service is provided to, or acquired by, a person as a wholesale client if it is not provided to, or acquired by, the person as a retail client (s761G(4)).
•     A financial product or a financial service is provided to a person as a retail client unless s761G(5), (6), (6A) or (7) or 761GA provides otherwise (s761G(1)).
•     If a financial product or service is or would be provided to, or acquired by, a body corporate as a wholesale client, related bodies corporate of the client are taken to be wholesale clients in respect of the provision or acquisition of that financial product or financial service (s761G(4A) and r7.6.02AD).

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.

CA ss761G(7) and 761GA– The Rule for Most Products
A financial product or financial service is provided to a person as a retail client unless one or more of the following apply:
(a)   the price for the provision of the product, or the value of the product to which the service relates, equals or exceeds the amount specified in the regulations for these purposes (currently $500,000: see rr7.1.18 to 7.1.24 - but note that this excludes superannuation-sourced money: r7.1.26);
(b)   the product or service is provided for use in connection with a business that is not a small business;
(c)   the product or service is not provided for use in connection with a business, and the person who acquires it gives the provider, before it is provided, a copy of a certificate given within the preceding 2 years (r7.6.02AF) by a qualified accountant that states that the person:
  (i)   has net assets of at least the amount specified in the regulations for these purposes (currently $2,500,000: r7.1.28(1)); or
  (ii)   has a gross income for each of the last 2 financial years of at least the amount specified in the regulations for these purposes (currently $250,000: r7.1.28(2));
(ca)  the product or service is acquired by a company or trust controlled by a person who meets the requirements of (c)(i) or (ii) above (CR r7.6.02AB);
(d)   the person is a professional investor; or
(e)   the product or service is not provided for use in connection with a business and the person who acquires it is a sophisticated investor within the meaning of s761GA.

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 – 7.1.24 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 CO 01/1256 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.

CA s761G(12) – Meaning of "Small Business"
In this section, small business means a business employing less than:
(a)   if the business is or includes the manufacture of goods - 100 people; or
(b)   otherwise - 20 people.

 

CA s9 – Meaning of "Professional Investor"
Professional investor means:
(a)   a financial services licensee;
(b)   a body regulated by APRA, other than the trustee of:
  (i)   a superannuation fund;
  (ii)   an approved deposit fund;
  (iii)   a pooled superannuation trust; or
  (iv)   a public sector superannuation scheme;
(c)   a body registered under the Financial Corporations Act 1974;
(d)   the trustee of:
  (i)   a superannuation fund;
  (ii)   an approved deposit fund;
  (iii)   a pooled superannuation trust; or
  (iv)   a public sector superannuation scheme;
  which has net assets of at least $10 million;
(e)   a person who has or controls gross assets of at least $10 million, including any assets held by an associate or under a trust that the person manages (r7.6.02AE);
(f)   a listed entity or a related body corporate of a listed entity;
(g)   an exempt public authority;
(h)   a body corporate or unincorporated body that:
  (i)   carries on a business of investment in financial products, interests in land or other investments; and
  (ii)   for those purposes, invests funds received (directly or indirectly) following an offer or invitation to the public, within the meaning of s82, the terms of which provided for the funds subscribed to be invested for those purposes;
(i)   a foreign entity that, if established or incorporated in Australia, would be covered by one of the preceding paragraphs.

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").

CA s761GA – Meaning of "Sophisticated Investor"
A financial product or a financial service in relation to a financial product is not provided by one person to another person as a retail client if:
(a)   the first person (the licensee) is a financial services licensee; ...
(d)   the licensee is satisfied on reasonable grounds that the other person (the client) has previous experience in using financial services and investing in financial products that allows the client to assess:
  (i)   the merits of the product or service;
  (ii)   the value of the product or service;
  (iii)   the risks associated with holding the product;
  (iv)   the client’s own information needs; and
  (v)   the adequacy of the information given by the licensee and the product issuer;
(e)   the licensee gives the client before, or at the time when, the product or advice is provided a written statement of the licensee’s reasons for being satisfied as to those matters; and
(f)   the client signs a written acknowledgment before, or at the time when, the product or service is provided that:
  (i)   the licensee has not given the client a PDS;
  (ii)   the licensee has not given the client any other document that would be required to be given to the client under Chapter 7 if the product or service were provided to the client as a retail client; and
  (iii)   the licensee does not have any other obligation to the client under Chapter 7 that the licensee would have if the product or service were provided to the client as a retail client.

Again, this rule does not apply to general insurance, superannuation or RSA products or traditional trustee company services, which have their own special rules (s761GA(b)) - see below. It also does not apply if the financial product or service is provided for use in connection with a business (s761GA(c)).

CA s761G(5) - The Rule for General Insurance Products
A general insurance product or service that relates to a general insurance product is provided to a person as a retail client if:
(a)   either:
  (i)   the person is an individual; or
  (ii)   the insurance product is or would be for use in connection with a small business (see s761G(12)); and
(b)   the product is motor vehicle, home building, home contents, sickness and accident, consumer credit, travel or personal and domestic property insurance or a kind of general insurance product prescribed by regulations made these purposes.
Otherwise, a general insurance product or a service related to such a product that is provided to a person is not provided to them as a retail client.

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.

CA s761G(6) – The Rule for Superannuation and RSA Products
(a)   An interest in a pooled superannuation trust that is provided by the trustee of that trust to a person covered by (b)(i) below is not provided to them as a retail client.
(b)   A financial service related to a superannuation product or an RSA product that is provided to:
  (i)   the trustee of a superannuation fund, an approved deposit fund, a pooled superannuation trust or a public sector superannuation scheme (within the meaning of SISA) that has net assets of at least $10 million; or
  (ii)  an RSA provider (within the meaning of the RSAA),
  is not provided to them as a retail client.
Otherwise, a superannuation product or RSA product or a service related to such a product that is provided to a person is provided to them as a retail client.

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

CA s761G(6A) - The Rule for Traditional Trustee Company Services
If a financial service provided to a person is a traditional trustee company service, the service is provided to the person as a retail client unless regulations made for these purposes provide otherwise.

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.

CA s761G(11) – General Insurance Products Combined With Other Products
If:
(a)   either:
  (i)   in a single transaction, 2 or more financial products are provided to a person; or
  (ii)   a single financial service provided to a person relates to 2 or more financial products; and
(b)   one or more, but not all, of the financial products are general insurance products;
s761G(5) applies to the transaction or service so far as it relates to the general insurance products, and s761G(6) or (7), as the case requires, applies to the transaction or service so far as it relates to other financial products.

 

CR r7.1.19(5) – Aggregating Transactions Done at the Same Time
If, at a single point in time:
(a)   a financial service that is being provided to a client is:
  (i)   financial product advice; or
  (ii)   arranging for a person to engage in conduct in accordance with s766C(2) (ie dealing); and
(b)   the financial service is provided in respect of:
  (i)   more than 1 investment-based financial product;
  (ii)   more than 1 income financial stream financial product; or
  (iii)   a combination of investment-based financial products and income financial stream financial products; and
(c)   either:
  (i)   the total price for the provision of those financial products is at least $500,000; or
  (ii)   the price or value of all of those financial products is at least $500,000;

the value of the financial products is taken ... to be greater than [$500,000].

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.

CR r7.1.17B – Aggregating Transactions by Associates
Where a class of financial products is provided by the same product issuer at or about the same time to a particular person or their associate or a body corporate controlled and wholly owned by them, the price for the provision, or the value, of the financial products may be calculated by:
(a)   calculating the total price/value of all of the financial products in the class; and
(b)   treating it as the price/value of a single financial product provided to the particular person.

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.

Return to Outline


Personal vs General Advice

CA s766B(1) - Meaning of Financial Product Advice
For the purposes of this Chapter, financial product advice means a recommendation or a statement of opinion, or a report of either of those things, that:
(a)   is intended to influence a person or persons in making a decision in relation to a particular financial product or class of financial products, or an interest in a particular financial product or class of financial products; or
(b)   could reasonably be regarded as being intended to have such an influence.

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 (see para (a) in the definition of "exempt document or statement" in s766B(9)). 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 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 (see para (b) in the definition of "exempt document or statement" in s766B(9)). 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 registered tax agent or BAS agent 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 rr7.1.28AA - 7.1.33H.

CA s766B(3) – Meaning of Personal and General Advice
•     There are 2 types of financial product advice: personal advice and general advice (s766B(2)).
•     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)).

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 175.45). Appendix 1 to RG 175 has examples of the difference between personal advice and general advice.

Return to Outline


Financial Services Guides

CA ss941A and 941B - Obligation to Give an FSG
If a financial services licensee, or an authorised representative of a financial services licensee acting as representative, provides a financial service to a person (the client) as a retail client, they must give the client a Financial Services Guide (FSG).

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

For ASIC's guidance on the obligation to provide an FSG, see Section C of ASIC Regulatory Guide 175 Licensing: Financial product advisers – Conduct and disclosure.

CA s941D – Timing
•     Generally, the FSG must be given to the client as soon as practicable after it becomes apparent that the financial service will be, or is likely to be, provided to the client, and must in any event be given to the client before the financial service is provided.
•     In time critical cases, the client can instead be given a statement that contains the information that would be required in the FSG by ss942B(2)(e), (f) and (i)/942C(2)(f), (g) and (j) and such other information as would be required in the FSG that is particularly relevant to the financial service to be provided, and must then be given the FSG within 5 business days or sooner if practicable (see r7.7.10AF(3)).

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

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 12/417, 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 earlier time the statement referred to in s941D is provided to the client.

CA s942B(2) – Main FSG Content Requirements for Licensees
An FSG issued by a licensee must include the following statements and information:
(a)   a statement setting out the name and contact details of the licensee;
(b)   a statement setting out any special instructions about how the client may provide instructions to the licensee;
(c)   either:
  (i)   information about the financial services (authorised services) that the licensee will be, or is likely to be, providing to the client and the kinds of financial products to which those services relate; or
  (ii)   information about the kinds of financial services (authorised services) that the licensee is authorised by its licence to provide and the kinds of financial products to which those services relate (see r7.7.10AB(1));
(d)   information about who the licensee acts for when providing the authorised services;
(e)   information about the remuneration (including commission) or other benefits that any of the following is to receive in respect of, or that is attributable to, the provision of any of the authorised services:
  (i)   the licensee;
  (ii)   a related body corporate of the licensee;
  (iii)   a director or employee of the licensee or a related body corporate;
  (iv)   an associate of any of the above;
  (v)   any other person in relation to whom the regulations require the information to be provided;
(f)   information about any associations or relationships between the licensee, or any related body corporate, and the issuers of any financial products, being associations or relationships that might reasonably be expected to be capable of influencing the licensee in providing any of the authorised services;
(g)   if the licensee provides "further advice" (as defined in s946B) - a statement in relation to which the following requirements are satisfied:
  (i)   the statement must indicate that the client may request a record of further advice that is provided to them, if they have not already been provided with a record of that advice;
  (ii)   the statement must set out particulars of how the client may request such a record; and
  (iii)   any limitations in those particulars on the time within which the client may request such a record must be consistent with any applicable requirements in regulations made for these purposes or, if there are no such applicable requirements, must be such as to allow the client a reasonable opportunity to request a record of the advice (see r7.7.10AC(1));
(h)   information about the dispute resolution system that covers complaints by persons to whom the licensee provides financial services, and about how that system may be accessed;
(i)   if the licensee acts under a binder in providing any of the authorised services - a statement that:
  (i)   identifies the services provided under the binder;
  (ii)   states that they are provided under a binder; and
  (iii)   explains the significance of the services being provided under a binder;
(j)   if the licensee is a participant in a licensed market or a licensed CS facility - a statement that the licensee is a participant in that market or facility; and
(k)   any other statements or information required by the regulations.

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."

CA s942C(2) – Main FSG Content Requirements for Authorised Representatives
An FSG issued by an authorised representative of a licensee must include the following statements and information:
(a)   a statement setting out the name and contact details of the representative;
(b)   a statement setting out any special instructions about how the client may provide instructions to the representative;
(c)   either:
  (i)   information about the financial services (authorised services) that the representative will be, or is likely to be, providing to the client and the kinds of financial products to which those services relate; or
  (ii)   information, in relation to the authorising licensee or each of the authorising licensees, about the kinds of financial services (authorised services) that the representative provides as representative of the authorising licensee and the kinds of financial products to which those services relate (see r7.7.10AB(2));
(d)   information about who the authorising licensee, or each of the authorising licensees, acts for when financial services are provided on their behalf by the representative (see r7.7.10AB(2));
(e)   a statement:
  (i)   setting out the name and contact details of the authorising licensee, or of each of the authorising licensees; and
  (ii)   stating that the representative is the authorised representative of that licensee or those licensees (see r7.7.10AB(2));
(f)   information about the remuneration (including commission) or other benefits that any of the following is to receive in respect of, or that is attributable to, the provision of any of the authorised services:
  (i)   the representative;
  (ii)   an employer of the representative;
  (iii)   the authorising licensee, or any of the authorising licensees;
  (iv)   an employee or director of the authorising licensee, or of any of the authorising licensees;
  (v)   an associate of any of the above; or
  (vi)   any other person in relation to whom the regulations require the information to be provided;
(g)   information about any associations or relationships between:
  (i)   the representative, or any employer of the representative, and the issuers of any financial products; or
  (ii)   the authorising licensee, or any of the authorising licensees, or any related body corporate of the authorising licensee or any of the authorising licensees, and the issuers of any financial products;
  being associations or relationships that might reasonably be expected to be capable of influencing the representative in providing any of the authorised services;
(h)   if the representative, when acting as representative of the authorising licensee or any of the authorising licensees, provides "further advice" (as defined in s946B) - a statement in relation to which the following requirements are satisfied:
  (i)   the statement must indicate that the client may request a record of further advice that is provided to them, if they have not already been provided with a record of that advice;
  (ii)   the statement must set out particulars of how the client may request such a record;
  (iii)   any limitations in those particulars on the time within which the client may request such a record must be consistent with any applicable requirements in regulations made for these purposes or, if there are no such applicable requirements, must be such as to allow the client a reasonable opportunity to request a record of the advice (see r7.7.10AD(1));
(i)   information about the dispute resolution system that covers complaints by persons to whom the representative provides financial services when acting as representative of the authorising licensee or any of the authorising licensees, and about how that system may be accessed;
(j)   if the representative acts under a binder in providing any of the authorised services - a statement that:
  (i)   identifies the services provided under the binder;
  (ii)   states that they are provided under a binder; and
  (iii)   explains the significance of the services being provided under a binder;
(k)   if the representative, or the authorising licensee or any of the authorising licensees, is a participant in a licensed market or a licensed CS facility - a statement that the representative or authorising licensee is a participant in that market or facility;
(l)   a statement to the effect that the distribution of the FSG by the representative has been authorised by the authorising licensee, or by each of the authorising licensees; and
(m)   any other statements or information required by the regulations.

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 (as explained in the next paragraph), the authorised representative number allocated by ASIC to the authorised representative (CR r7.7.05A).

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.

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 rr7.7.04 and 7.7.07 - Prescribed Disclosures about Referral Fees
An FSG must include the following information about all remuneration, commission and other benefits (benefits) that a person mentioned in ss942B(2)(e) or 942C(2)(f) (as applicable) or any other person has received, or is to receive, for referring a potential client to the financial services licensee/representative:
•     if the amount of the benefit is able to be ascertained at the time the FSG is given to the client, the amount;
•     if the amount of the benefit is not able to be ascertained at the time the FSG is given to the client and the providing entity reasonably believes that personal advice will be given to the client:
  •     either: (i) particulars of the benefit, including, to the extent relevant, a statement of the range of amounts or rates of benefit; or (ii) general information about the benefit and the manner in which the benefit is to be calculated; and
  •     a statement that: (i) if the benefit is calculable at the time the personal advice is given, the benefit the person receives on specified financial products to which the personal advice relates will be disclosed at the time the personal advice is given or as soon as practicable after that time; or (ii) if the benefit is not calculable at the time the personal advice is given, the manner in which the benefit is to be calculated will be disclosed at the time the personal advice is given or as soon as practicable after that time;
•     if the amount of the benefit is not able to be ascertained at the time the FSG is given to the client and the providing entity reasonably believes that personal advice will NOT be given to the client:
  •     particulars of the benefit, including, to the extent relevant, a statement of the range of amounts or rates of benefit; or
  •     both: (i) general information about the benefit and the manner in which the benefit is to be calculated; and (ii) a statement that the client may request particulars of the benefit but that the request must be made within a reasonable time after the client is given the FSG and before any financial service identified in the FSG is provided to the client.

Where the client requests particulars under the last bullet point, to the extent relevant, those particulars must include a statement, worded in a manner that is easy for the client to understand, 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).

Other FSG Content Requirements
•     The title "Financial Services Guide" must be used on the cover of, or at or near the front of, an FSG. In any other part, the abbreviation "FSG" may be used (s942A).
•     The FSG must contain an easily understood and prominent statement describing the purpose and content of the FSG and, if appropriate, informing the client that they may also receive a SOA and/or a PDS, with a description of the purpose and content of those documents (CR rr7.7.03/7.7.06).
•     The information in the FSG must be up to date as at the time when it is given to the client (s941E).
•     The information in the FSG must be worded and presented in a clear, concise and effective manner (s942B/C(6A)).
•     The level of information required is whatever 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 (s942B/C(3)).

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)).

FSG Form Requirements
•     An FSG may also contain other information (s942B/C(6)).
•     An FSG may be made up of 2 or more separate documents that are given at the same time, provided they are both appropriately labelled as component parts of the FSG (s942D).
•     An FSG may be combined with a PDS in a single document but only where permitted under the regulations (s942DA and r7.7.08A).
•     An FSG must be dated. The date must be the date on which the FSG was prepared or its preparation was completed (s942B/C(5)).

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 – How to Give an FSG
An FSG, Supplementary FSG or SOA is given by a person (the providing entity) to another person (the client) if (and only if):
(a)   it is:
  (i)   given to the client, or to the client's agent, personally;
  (ii)   sent to the client, or the client's agent, at an address (including an electronic address) or fax number nominated by the client or the client's agent; or
  (iii)   otherwise made available to the client, or the client's agent, as agreed between the client, or the client's agent, and the providing entity; and
(b)   it is in printed or electronic form.

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.

CA s942E - Altering an FSG
A financial services licensee or its authorised representative must not give a person an FSG that has been altered after the date specified in it as its date of preparation unless:
(a)   the alteration was made by, or with the authority of, the financial services licensee; and
(b)   if the alteration is a material alteration - the date of the FSG has been changed to the date on which the alteration was made.

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

CA s941F - Obligation to Give Updated FSG
If:
(a)   an FSG is given to the client before a financial service is provided;
(b)   there is a change in circumstances before the service is provided, and the FSG does not contain the information it would be required to contain if it were given to a person immediately after that change; and
(c)   the fact that the FSG does not contain the up to date information is materially adverse from the point of view of a reasonable person deciding, as a retail client, whether to proceed to be provided with the financial service;
the client must be given either: (i) another FSG that contains the up to date information before the service is provided; or (ii) a Supplementary FSG that updates the information in the FSG.

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.

Supplementary FSGs
•     A Supplementary FSG may be given to:
  •     correct a misleading or deceptive statement in the FSG;
  •     correct an omission from the FSG of information it is required to contain; or
  •     update the information contained in the FSG (s943A(1)).
•     When given, the original FSG is taken to include the information and statements contained in the Supplementary FSG (s943D).
•     Title and form requirements for Supplementary FSGs are set out in ss943B and 943C.

 

CA s941C - Situations in Which an FSG is Not Required
•     The client has already received an FSG containing all the required information (s941C(1)).
•     Product issuers dealing in their own products (other than derivatives able to be traded on a licensed market) (s941C(2)).
•     Mere operation of a registered managed investment scheme as responsible entity (s941C(3)).
•     General advice provided to the public, or a section of the public, in the manner prescribed in the regulations (s941C(4)).
•     Services related to a basic deposit product, a non-cash payment facility related to a basic deposit product or other prescribed product (s941C(6)).
•     In a recommendation, issue or sale situation, the client is provided with a PDS together with a statement that:
  •     contains so much of the information required by s942B/942C and any regulations made for the purposes of that section as is not already set out in the PDS;
  •     is up to date as at the time it is given to the client; and
  •     meets the requirements of ss942B(3) and (6A)/942C(3) and (6A), as applicable (s941C(7A) and r7.7.02A(2)).
•     The client has already received a PDS and an accompanying statement that together contain all the required information (ss941C(1A), (7A) and (7B) and r7.7.02A(1)).
•     Situations prescribed in the regulations (s941C(8)).

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, webcasts 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(1) 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; and (c) cash management trust interests. 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 and seventh bullet points, s941C(1A) and (7A) (as introduced by s7.7.02A(2)) provide that a client does not have to be provided with an FSG if the client is given a PDS plus a statement setting out any other information required in an FSG that meets the requirements of r7.7.02(7B). The latter reg requires that the statement is up to date at the time it is given to the client and meets the requirements of ss942B(3) and (6A)/ss942C(3) and (6A) (ie 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 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), as introduced by 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), 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.

Return to Outline


Statements of Advice

CA s946A - Obligation to Give an SOA
A financial services licensee or authorised representative (the adviser) giving personal advice to a retail client must give the client a Statement of Advice complying with the Corporations Act. This may be the means by which the advice is provided or a separate record of the 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).

For ASIC's guidance on the obligation to provide an SOA or ROA, see Section D of ASIC Regulatory Guide 175 Licensing: Financial product advisers – Conduct and disclosure.

CA s946C - Timing
•     If the SOA is not the means by which the advice is provided, the SOA must be given to the client when, or as soon as practicable after, the advice is provided and, in any event, before the adviser provides the client with any further financial service that arises out of or is connected with that advice.
•     If the SOA is not given to the client when the advice is provided, the providing entity must, when the advice is provided, give the client a statement that contains the information that would be required to be in an SOA by ss947B(2)(d) and (e)/s947C(2)(e) and (f), and if applicable by section 947D.
•     In time critical cases, the client can instead be given the statement referred to in the previous bullet point and must then be given the SOA:
  •     if that further service is the provision to the person of a financial product with a cooling-off period, before the start of that period, or sooner if practicable; or
  •     otherwise - within 5 business days (see r7.7.10AH) after providing that further service, or sooner if practicable.

The sections referred to in the second bullet point are those requiring disclosure in an SOA of information about remuneration and other interests and associations that may influence the advice, and (where s947D applies) 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 SOA to the client before that further service is provided as so instructed.

CA s947B – Main Content Requirements for Licensees
An SOA issued by a licensee must include the following statements and information:
(a)   a statement setting out the advice;
(b)   information about the basis on which the advice is or was given;
(c)   a statement setting out the name and contact details of the licensee;
(d)   information about any remuneration (including commission) or other benefits that any of the following is to receive that might reasonably be expected to be or have been capable of influencing the licensee in providing the advice:
  (i)   the licensee;
  (ii)   a related body corporate of the licensee;
  (iii)   a director or employee of the licensee or a related body corporate;
  (iv)   an associate of any of the above;
  (v)   any other person in relation to whom the regulations require the information to be provided;
(e)   information about:
  (i)   any other interests, whether pecuniary or not and whether direct or indirect, of the licensee or of any associate of the licensee; and
  (ii)   any associations or relationships between the licensee or any associate of the licensee and the issuers of any financial products;
  that might reasonably be expected to be or have been capable of influencing the licensee in providing the advice;
(f)   if s961H requires a warning to be given to the client in relation to the advice - a statement setting out, or recording, the warning required by that section;
(g)   any other statements or information required by the regulations; and
(h)   unless in accordance with the regulations and a determination by ASIC, information to be disclosed in accordance with (d) and (e)(i) must be stated as amounts in dollars (see r7.7.10A(1)).

CR r7.7.09B generally permits incorporation of information by reference in an SOA.

In relation to (f), CA s961H specifies the warning that must be given if the advice is based on incomplete or inaccurate information.

In relation to (g), 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 about which they are required to make reasonable enquiries under CA s985F and CR r7.8.09.

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.

CA s947C – Main Content Requirements for Authorised Representatives
An SOA issued by an authorised representative of a licensee must include the following statements and information:
(a)   a statement setting out the advice;
(b)   information about the basis on which the advice is or was given;
(c)   a statement setting out the name and contact details of the representative;
(d)   a statement:
  (i)   setting out the name and contact details of the authorising licensee, or of each of the authorising licensees; and
  (ii)   stating that the representative is the authorised representative of that licensee or those licensees;
(e)   information about the remuneration (including commission) or other benefits that any of the following is to receive that might reasonably be expected to be or have been capable of influencing the representative in providing the advice:
  (i)   the representative;
  (ii)   an employer of the representative;
  (iii)   the authorising licensee, or any of the authorising licensees;
  (iv)   an employee or director of the authorising licensee, or of any of the authorising licensees;
  (v)   an associate of any of the above; or
  (vi)   any other person in relation to whom the regulations require the information to be provided;
(f)   information about:
  (i)   any other interests, whether pecuniary or not and whether direct or indirect, of the representative, any employer of the representative, the authorising licensee or any of the authorising licensees, or of any associate of any of those persons; and
  (ii)   any associations or relationships between the representative, any employer of the representative, the authorising licensee or any of the authorising licensees, or any associate of any of those persons, and the issuers of any financial products;
  that might reasonably be expected to be or have been capable of influencing the representative in providing the advice;
(g)   if s961H requires a warning to be given to the client in relation to the advice - a statement setting out, or recording, the warning required by that section;
(h)   any other statements or information required by the regulations; and
(i)   unless in accordance with the regulations and a determination by ASIC, information to be disclosed in accordance with (e) and (f)(i) must be stated as amounts in dollars (see r7.7.10A(3)).

Again, in relation to (g), s961H specifies the warning that must be given if the advice is based on incomplete or inaccurate information.

In relation to (h), 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 CA s985F and CR r7.8.09.

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). Again, for ASIC's policy on compliance with the dollar disclosure regime, see ASIC Regulatory Guide 182 Dollar Disclosure.

Other SOA Content Requirements
•     The title "Statement of Advice" must be used on the cover of, or at or near the front of, a Statement of Advice. Elsewhere the abbreviation "SoA" may be used (s947A).
•     The statements and information included in the Statement of Advice must be worded and presented in a clear, concise and effective manner (s947B/C(6)).
•     The level of detail required is whatever a person would reasonably require for the purpose of deciding whether to act on the advice as a retail client (s947B/C(3)).
•     An SOA may also include other information (s947B/C(5)).
•     An SOA must not be combined in a single document with an FSG or a PDS (s947E).

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: Scaled advice for a new client.

CA s947D - Additional Requirements When Advice Recommends Replacement of One Product With Another
Where the advice is or includes a recommendation that the client dispose of, or reduce the client’s interest in, all or part of a particular financial product and instead acquire all or part of, or increase the client’s interest in, another financial product, the following additional information must be included in the SOA:
(a)   information about the following, to the extent that the information is known to, or could reasonably be found out by, the adviser:
  (i)   any charges the client will or may incur in respect of the disposal or reduction;
  (ii)   any charges the client will or may incur in respect of the acquisition or increase;
  (iii)   any pecuniary or other benefits that the client will or may lose (temporarily or otherwise) as a result of taking the recommended action;
(b)   information about any other significant consequences for the client of taking the recommended action that the adviser knows, or ought reasonably to know, are likely;
(c)   any other information required by regulations made for these purposes; and
(d)   unless in accordance with the regulations and a determination by ASIC, information to be disclosed in accordance with (a) must be stated as amounts in dollars (see r7.7.10A(5)).

CA s947D also applies where an advice is or includes a recommendation that the client dispose of, or reduce the client’s interest in, a MySuper product offered by a regulated superannuation fund and instead acquire an interest, or increase the client’s interest, in another MySuper product or a choice product offered by the fund.

If the adviser knows that, or is reckless as to whether, the client will or may incur charges, will or may lose benefits, or there will or may be consequences for the client, but the adviser does not know, and cannot reasonably find out, what those charges, losses or consequences are or will be, the SOA must include a statement to the effect that there will or may be such charges, losses or consequences but the adviser does not know what they are (s947D(3)).

In relation to (d), ASIC has the power to grant relief from the requirement to state amounts in dollars (see rr7.7.13A and 7.7.13B). For ASIC's policy on compliance with the dollar disclosure regime, see ASIC Regulatory Guide 182 Dollar Disclosure.

CA s946AA - SOA Not Required For Small Investments
An SOA is not required for particular advice if:
•     the total value of all financial investments in relation to which the advice is provided does not exceed the threshold amount prescribed in the regulations (currently $15,000 - r7.7.09A(1));
•     the advice does not relate to a derivative, general insurance product or life risk insurance product (except to the extent that advice about a superannuation product relates to a life risk insurance product); and
•     the advice does not relate to any superannuation product or RSA product, unless the client already has an interest in the product (s946AA(1)).
The adviser must keep a record of the small investment advice in accordance with the regulations (s946AA(4)) and give a copy to the client (s946AA(5)).

To calculate total value, if the advice just relates to an acquisition or to a disposal, you look at the total value of the financial products being acquired or disposed of (as the case may be). If it relates to both an acquisition and a disposal, you look at whichever is the greater of the total value of the financial products being acquired and the total value of the financial products being disposed of (s946AA(2)). CR r7.7.09A provides guidance on how to calculate "total value" for these purposes.

CR r7.7.08C requires a record of small investment advice to set out: (a) brief particulars of the recommendations made to the client and the basis on which the recommendations are made; (b) brief particulars of the information that would be required by s947D(2) if an SOA were given to the client; (c) the statement that would be required by s947D(3) if an SOA were given to the client; and (d) the information that would be required in an SOA by ss947B(2)(d) and (e)/ss947C(2)(e) and (f) (ie remuneration and associations).

Except in time critical cases, an ROA must be given to a client when, or as soon as practicable after, the relevant investment advice is provided to the client and, in any event before the providing entity provides the client with any further financial service that arises out of or in connection with the investment advice (s946AA(6) and r7.7.09A(10)). If the ROA is not given to the client when the investment advice is provided, the adviser must, at the time the investment advice is provided, give the client a statement that contains the information that would be required to be in an SOA by ss947B(2)(d) and (e)/ss947C(2)(e) and (f) (ie remuneration and associations) and, if applicable, by s947D (extra information where products are being replaced) (r7.7.09A(11)).

In time critical cases (ie where client expressly instructs that they require a further financial service to be provided immediately or by a specified time, the further financial service arises out of or in connection with the investment advice given to the client, and it is not reasonably practicable to give an ROA to the client before the further service is provided as so instructed), the ROA must be given to the client: (a) if the financial product is one that has a cooling off period under s1019B, before the start of that period or sooner if practicable; or (b) otherwise within 5 days after providing the further service or as soon as practicable (r7.7.09A(12)).

Unlike records of further advice (see below), the Act and Regulations do not appear to specify a time period for the record of advice given under s946AA to be retained. This appears to be a drafting error in the Regulations. The time period should have been specified in Regulations under CA s946AA(4), but the regulations purportedly adopted under that section (r7.7.09A(10)) deal with when a record of advice must be given and simply repeat what is already said in s946AA(6).

CA s946B(1)-(4) - SOA Not Required For "Further Advice"
An SOA is not required for particular advice ("further advice") if:
•     the adviser has previously given the client an SOA that sets out the client’s relevant personal circumstances in relation to the advice set out in that SOA;
•     the client’s relevant personal circumstances in relation to the further advice (determined having regard to the client’s objectives, financial situation and needs as currently known to the adviser) are not significantly different from the client’s relevant personal circumstances in relation to the previous advice; and
•     so far as the basis on which advice is given relates to other matters — the basis on which the further advice is given is not significantly different from the basis on which the previous advice was given (s946B(2)).
The adviser must keep a record of the further advice in accordance with the regulations (s946B(3A)) and give a copy to the client upon request (ss942B(8) and 942C(8), as amended by rr7.7.10AC(2) and 7.7.10AD(2)).

Note that CA ss946B(1)-(4) have purportedly been replaced in their entirety by CR r7.7.10AE (I say "purportedly" because there are some legal issues with the way in which this regulation has been adopted and s946B then subsequently amended - see the notes under the next slide and  '8B. The perils of legislative laziness' in Lewis, A Decade On - Reforming the Financial Services Law Reforms).

At the same time or as soon as practicable after the further advice is given to the client, the client must be given the information that would, if an SOA were to be given, be required to be in the SOA by ss947B(2)(d) and (e)/947C(2)(e) and (f) (ie remuneration and associations) and, if applicable, by s947D (extra information where products are being replaced) – s946B(3).

CR r7.7.09 requires a record of further advice to set out: (a) the advice given to the client by the adviser and, if information or a statement required by ss947D(2) and (3) is given, the information and statement; OR (b) brief particulars of the recommendations made and the basis on which the recommendations are made; if information under s947D(2) is given, brief particulars of the information; and if a statement under s947D(3) is given, an acknowledgement that the statement has been given. It may be kept in any form, including a tape recording, and must be kept for 7 years after the day on which the further advice is provided.

CA s946B(7)-(9) - SOA Not Required For Advice Not Recommending Acquisition or Disposal
An SOA is not required for particular advice if:
•     the advice does not recommend or state an opinion in respect of:
  •     the acquisition or disposal of any specific financial product, or the products of a specific issuer; nor
  •     a modification to an investment strategy or a contribution level in relation to a financial product held by the client; and
•     the following persons do not directly receive any remuneration (other than remuneration that is currently being received for an earlier acquisition of a product) or other benefit for, or in relation to, the advice:
  •     the adviser ;
  •     an employer of the adviser;
  •     the authorising licensee or any of the authorising licensees;
  •     an employee or director of the authorising licensee, or of any of the authorising licensees;
  •     an associate of any of the above;
  •     any other person prescribed by regulations made for these purposes.
The adviser must keep a record of the advice in accordance with the regulations (s946B(9)) and give a copy to the client upon request (ss942B(8) and 942C(8)).

Again, the client must be given the information that would, if an SOA were to be given, be required to be in the SOA by ss947B(2)(d) and (e)/947C(2)(e) and (f) (ie remuneration and associations) - s946B(8). This information must be given in the same communication as is used to provide the advice to the client.

CR r7.7.10AAA requires the record to set out: (a) the investment advice given to a client by the adviser; (b) brief particulars of the recommendations made to the client and the basis on which the recommendations are made; and (c) the information that would be required in an SOA by s947B(2)(d) and (e)/s947C(2)(e) and (f) (ie remuneration and associations). Unlike records of further advice, the Act and Regulations do not appear to specify a time period for the record of advice given under s946B(7) to be retained but, as rr7.7.05 and 7.7.08 entitle a client to request a copy within 7 years after the day on which the advice is provided, by necessary implication, it must be kept for 7 years.

Note that CA ss946B(1)-(6), which at the time comprised the whole of s946B, were substituted in their entirety by CR r7.7.10AE in 2005. CA ss946B(7)-(9) were added in 2007 by the Corporations Legislation Amendment (Simpler Regulatory System) Act 2007. It is not entirely clear that draftsperson of the latter Act recognised that s946B had been replaced in the regulations, as witnessed by the adoption of the sub-heading style used in the original provisions in Act rather than that used in the substituted provisions in the regulations. That suspicion is confirmed somewhat by the amendments made to ss942B(8) and 942C(8) by the same Act, which added a reference to "advice to which s946B(7) applies" to the references to "records of further market-related advice", without appreciating that ss942B(8) and 942C(8) had been amended by rr7.7.10AC(2) and 7.7.10AD(2) in 2005 to remove these references!!

CA s946B(5)-(6) - Other Situations in Which an SOA is Not Required
An SOA is not required for advice related to:
•     a basic deposit product;
•     a facility for making non-cash payments that is related to a basic deposit product; or
•     any other product prescribed by the regulations for these purposes (s946B(5)).

Note again that CA ss946B(5)-(6) have purportedly been replaced in their entirety by CR r7.7.10AE (I say "purportedly" because there are some legal issues with the way in which this regulation has been adopted and s946B then subsequently amended - see the notes under the previous slide and  '8B. The perils of legislative laziness' in Lewis, A Decade On - Reforming the Financial Services Law Reforms).

Again, the client must be given the information that would, if an SOA were to be given, be required to be in the SOA by ss947B(2)(d) and (e)/947C(2)(e) and (f) (ie remuneration and associations) – ss949B(6) (although note that this section, as introduced by CR r 7.7.10AE, appears to have a cross-reference error in that it refers to "if subsection (4) applies", when it should refer to subsection (5) - there is no subsection (4)).

CR r7.7.10 prescribes for these purposes: (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; (d) motor vehicle insurance; (e) home building insurance; (f) home contents insurance; (g) travel insurance; (h) personal and domestic property insurance; and (i) general insurance products prescribed by regulations made for the purposes of s761G(5)(b)(viii).

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Acting in the Client's Best Interests

CA s961B - Requirement to Act in Client's Best Interests
(1)   An individual providing personal advice to a retail client (adviser) must act in the best interests of the client in relation to the advice.
(2)   The adviser satisfies this duty if they prove that they have done each of the following:
  (a)   identified the objectives, financial situation and needs of the client that are disclosed to the provider by the client by instructions;
  (b)   identified:
    (i)   the subject matter of the advice that has been sought by the client (whether explicitly or implicitly); and
    (ii)   the objectives, financial situation and needs of the client that would reasonably be considered as relevant to advice sought on that subject matter (the client’s relevant circumstances);
  (c)   where it was reasonably apparent that information relating to the client’s relevant circumstances was incomplete or inaccurate, made reasonable inquiries to obtain complete and accurate information;
  (d)   assessed whether the adviser has the expertise required to provide the client advice on the subject matter sought and, if not, declined to provide the advice;
  (e)   if, in considering the subject matter of the advice sought, it would be reasonable to consider recommending a financial product:
    (i)   conducted a reasonable investigation into the financial products that might achieve those of the objectives and meet those of the needs of the client that would reasonably be considered as relevant to advice on that subject matter; and
    (ii)   assessed the information gathered in the investigation;
  (f)   based all judgements in advising the client on the client’s relevant circumstances; and
  (g)   taken any other step that, at the time the advice is provided, would reasonably be regarded as being in the best interests of the client, given the client’s relevant circumstances.

Para (2) above effectively provides a 'safe harbour' that advisers may rely on to prove they have complied with the best interests duty in para (1).

A licensee or authorised representative potentially contravenes a civil penalty provision if an adviser for whom they are responsible fails to comply with this section (ss961K and 961Q). The licensee may also be liable to compensate a client for any loss or damage they may suffer as a result of the contravention (s961M) and subject to various other remedial orders, such as an order declaring a contract void or requiring the repayment of the client's money (s961N). The adviser in question may be subject to a banning order for breaching a financial services law (s920A). A licensee also has a separate obligation to take reasonable steps to ensure that its representatives comply with s961B (s961L).

The note to this section states: "The matters that must be proved under s961B(2) relate to the subject matter of the advice sought by the client and the circumstances of the client relevant to that subject matter (the client’s relevant circumstances). That subject matter and the client’s relevant circumstances may be broad or narrow, and so the section anticipates that a client may seek scaled advice and that the inquiries made by the adviser will be tailored to the advice sought. See generally ASIC Regulatory Guide 244 Giving information, general advice and scaled advice.

CAs961B(3) provides that if the subject matter of the advice sought by the client relates only to a basic banking product, a general insurance product, consumer credit insurance or a combination of any of those products and the adviser is an agent or employee of an Australian ADI, or otherwise acting by arrangement with an Australian ADI under the name of the Australian ADI, the adviser satisfies the duty in (1) above if the adviser takes the steps mentioned in paragraphs (2)(a), (b) and (c). A "basic banking product" means a basic deposit product, a facility for making non‑cash payments, a facility for providing traveller's cheques and any other product prescribed by regulations for these purposes (s961F).

Similarly, s961B(4) provides that if the subject matter of the advice sought by the client is solely a general insurance product, the adviser satisfies the duty in (1) above if the adviser takes the steps mentioned in paragraphs (2)(a), (b) and (c).

In relation to (2)(c) above, CA s961C provides that something is "reasonably apparent" if it would be apparent to a person with a reasonable level of expertise in the subject matter of the advice that has been sought by the client, were that person exercising care and objectively assessing the information given to the adviser by the client.

In relation to (2)(e) above, CA s961D provides that a reasonable investigation into the financial products that might achieve those of the objectives and meet those of the needs of the client that would reasonably be considered relevant to advice on the subject matter sought by the client does not require an investigation into every financial product available. However, if the client requests the adviser to consider a specified financial product, a reasonable investigation into the financial products that might achieve those of the objectives and meet those of the needs of the client that would reasonably be considered relevant to advice on the subject matter sought by the client includes an investigation into that financial product.

CA s961E provides that it would reasonably be regarded as in the best interests of the client to take a step, if a person with a reasonable level of expertise in the subject matter of the advice that has been sought by the client, exercising care and objectively assessing the client’s relevant circumstances, would regard it as in the best interests of the client, given the client’s relevant circumstances, to take that step.

In 2016, ASIC announced that it had accepted an enforceable undertaking from ACE Insurance admitting to a number of contraventions of the Corporations Act and ASIC Act, including the best interest obligations in CA ss961B/961L. ACE Insurance had contracted salespeople who travelled door-to-door selling and renewing Combined Insurance products, mostly in regional Australia. ASIC found that they had engaged in overselling policies (selling policies to consumers which duplicated coverage they already held and which exceeded the underwriting limits imposed by Combined), twisting or churning of policies (encouraging consumers to cancel their existing policies and take up new policies, resulting in a change of coverage for no benefit and, on some occasions, a detriment) and selling unsuitable policies (eg selling policies to consumers, such as disability pensioners, who were not eligible for coverage under the policies or to cover injuries, such as professional sports and off-road dirt-bike riding, that were specifically excluded under the policies). The undertaking required ACE Insurance to appoint an independent expert to review Combined's compliance systems, implement a remediation plan to compensate affected consumers and make a donation of $1 million to financial counselling and financial literacy initiatives. ACE Insurance also agreed to cease writing new Combined business. See ASIC Media Release 16-047MR.

CA s961G - Requirement to Give Appropriate Advice
The adviser must only provide the advice to the client if it would be reasonable to conclude that the advice is appropriate to the client, had the adviser satisfied the duty under s961B to act in the best interests of the client.

Again, a licensee or authorised representative potentially contravenes a civil penalty provision if an adviser for whom they are responsible fails to comply with this section (ss961K and 961Q). The licensee may also be liable to compensate a client for any loss or damage they may suffer as a result of the contravention (s961M) and subject to various other remedial orders, such as an order declaring a contract void or requiring the repayment of the client's money (s961N). The adviser in question may be subject to a banning order for breaching a financial services law (s920A). A licensee also has a separate obligation to take reasonable steps to ensure that its representatives comply with s961G (s961L).

CA ss961B and 961G were preceded by s945A, which provided that a financial services licensee or authorised representative (the adviser) giving personal advice to a retail client must only provide the advice to the client if: (a) the adviser determines the "relevant personal circumstances" in relation to giving the advice (that is, such of the client's objectives, financial situation and needs as would reasonably be considered to be relevant to the advice) and makes reasonable inquiries in relation to those personal circumstances; (b) having regard to information obtained from the client in relation to those personal circumstances, the adviser has given such consideration to, and conducted such investigation of, the subject matter of the advice as is reasonable in all of the circumstances; and (c) the advice is appropriate to the client, having regard to that consideration and investigation.

The level of enquiry required for a financial planner to have a reasonable basis for advice under the former s945A and to comply with their duty to act with reasonable professional care and skill was discussed in Newman v Financial Wisdom Limited [2004] VSC 216. In that case the Victorian Supreme Court accepted (at paragraphs 168 -175) the testimony of an expert financial planner that:

    

"... investment advisers [can] either carry out research and analyse investment products themselves or use research and analysis generated from external sources. The extent of the research and the analysis which it would be reasonable to expect the adviser to do [depends] on the nature of the product which [forms] the basis of the particular recommendation and the needs of the client being advised. [Advisers] often [rely] on information being supplied by external research organisations, in which case, the adviser should evaluate the overall quality and effectiveness of the analyses so provided so as to ensure that reliance placed on any such information [is] reasonable in all the circumstances. For the purpose of advising a client, the adviser should take into account general economic and other information in relation to markets, industries and securities so as to be in a position to make judgments about future income and growth expectations and risk factors associated with particular securities. An adviser should provide written reports to the client about recommended securities so that the client can understand the basis on which those securities are recommended. The reports should cover such matters as risks associated with the issuer of the security, risks associated with the product, market and economic risks, capital and income prospects and so on.

    

[A] financial adviser should [conduct] a detailed interview in which data [is] collected on the client's present financial position and their objectives [are] identified and agreed. The financial adviser should [prepare] a written financial plan so as to position the client to achieve an efficient use of their resources [which] also [advises] on immediate and future strategies to achieve the client's objectives, [records] the advice given and the reasons for the advice, [discloses] any interest of the adviser and [also refers] to the research undertaken on any recommended investment. Before recommending an investment, the adviser should either carry out research and analyse the investment or use research and analysis generated from external sources. The extent of the research and analysis [depends] on the nature of the investment product and the needs of the client. The adviser should be able to provide and should normally provide to the client sufficient written information about the investments recommended so that the basis on which they [are] considered appropriate for the client [can] be understood. Both risk factors and return expectations should be addressed, including risks associated with the issuer, risks associated with the product, market and economic risks and capital and income prospects.

    

[For conservative investors], ... a prudent financial planner would [advise] a mix of investments to provide some capital growth, low volatility, low risk and some income - varied according to the needs of the particular client. ...

    

[A] reasonable and prudent financial adviser would advise a client of the degree of risk involved in a particular investment, irrespective of the client's risk profile or the client's wish to obtain an immediate tax deduction and if, because of the nature of the investment, the financial adviser was not prepared to recommend it but the client insisted on going ahead, the adviser would have the client sign a written indemnity.

    

[There is] room for a prudent investment adviser to recommend speculative investments if the client so requested, provided that the circumstances of the client [are] such that any loss of capital involved [will] have no material effect on their achieving their goals and objectives."

Interestingly, ASIC has expressed the view in Regulatory Guide 175 Licensing: Financial product advisers – conduct and disclosure (at RG 175.344) that the inquiries an adviser needs to make under s961G are more extensive than those required under the former s945A.

The requirement to give appropriate advice was sorely tested with some of the more complex leveraged products marketed in the lead up to the GFC that eventually unravelled with the market downturn that followed. For instance, in 2012, FINRA penalised Citigroup, Morgan Stanley, UBS and Wells Fargo more than $9.1 million for selling leveraged and inverse exchange-traded funds to retail customers without having a reasonable basis for recommending the securities.

In early 2011, the UK Financial Services Authority fined Barclays Bank plc £7.7 million for failing to comply with the UK equivalent of s961G in relation to the sale of two particular investment funds to 12,000 or so investors, most of whom were retired or nearing retirement. Barclays was also required to contact customers and pay suitable redress (estimated to be as much as £60 million). The breaches found by the FSA included:

•   

failing to ensure the funds were suitable for customers in view of their investment objectives, financial circumstances, investment knowledge and experience;

•   

failing to ensure that training given to sales staff adequately explained the risks associated with the funds;

•   

failing to ensure product brochures and other documents given to customers clearly explained the risks involved and could not mislead customers; and

•   

failing to have adequate procedures for monitoring sales processes and responding promptly when issues were identified.

On this last point, the FSA noted that of the 12,000 or so investors, 1,730 (or nearly one in seven) had complained about the advice they were given to invest in the funds.

The FSA Guide, Assessing suitability: Establishing the risk a customer is willing and able to take and making a suitable investment selection is an interesting read in this space.

 

CA s961J - Advisor to Give Priority to Client's Interests
If the adviser knows, or reasonably ought to know, that there is a conflict between the interests of the client and the interests of:
•     the adviser:
•     a financial services licensee of whom the adviser is a representative;
•     an authorised representative who has authorised the adviser, under s916B(3), to provide a specified financial service or financial services on behalf of a financial services licensee; or
•     an associate of any of the above,
the adviser must give priority to the client’s interests when giving the advice.

Again, a licensee or authorised representative potentially contravenes a civil penalty provision if an adviser for whom they are responsible fails to comply with this section (ss961K and 961Q). The licensee may also be liable to compensate a client for any loss or damage they may suffer as a result of the contravention (s961M) and subject to various other remedial orders, such as an order declaring a contract void or requiring the repayment of the client's money (s961N).The adviser in question may be subject to a banning order for breaching a financial services law (s920A). A licensee also has a separate obligation to take reasonable steps to ensure that its representatives comply with s961J (s961L).

This section does not apply if the subject matter of the advice sought by the client is solely a basic banking product and the adviser is an agent or employee of an Australian ADI, or otherwise acting by arrangement with an Australian ADI under the name of the Australian ADI (s961J(2)). It also does not apply if the subject matter of the advice sought by the client is solely a general insurance product (s961J(3)).

Note that a condition of a contract or other arrangement is void if it provides that a party to the contract is required or bound to waive any of the obligations above (s960A). It is also a civil penalty provision for a person to enter into a scheme to avoid any of the obligations above (s965).

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Conflicted Remuneration

Ban on Conflicted Remuneration
•     AFSL holders and their representatives must not accept conflicted remuneration (ss963E, 963G and 963H).
•     Product issuers and sellers must not give conflicted remuneration to AFSL holders or their representatives (s963K).
•     Employers of an AFSL holder or representative must not give them conflicted remuneration for work they carry out as an employee (s963J).
•    

A platform operator must not accept a volume-based shelf-space fee from a funds manager (s964A).

•     AFSL holders and their authorised representatives providing financial product advice to a retail client must not charge asset-based fees on borrowed amounts used to acquire financial products by, or on behalf of, the client (ss964D and 964E).

"Conflicted remuneration" is defined in s963A to mean any benefit, whether monetary or non‑monetary, given to a financial services licensee, or a representative of a financial services licensee, who provides financial product advice to persons as retail clients that, because of the nature of the benefit or the circumstances in which it is given: (a) could reasonably be expected to influence the choice of financial product recommended by the licensee or representative to retail clients; or (b) could reasonably be expected to influence the financial product advice given to retail clients by the licensee or representative.

Volume‑based benefits are presumed to be conflicted remuneration unless the contrary is proved (s963L). For these purposes, "volume-based benefit" means a benefit access to which, or the value of which, is wholly or partly dependent on the total value or number of financial products of a particular class, or particular classes, and which is recommended by a financial services licensee, or a representative of a financial services licensee, to retail clients, or a class of retail clients or acquired by retail clients, or a class of retail clients, to whom a financial services licensee, or a representative of a financial services licensee, provides financial product advice.

There are numerous exclusions from the ban on conflicted remuneration set out in the CA and CR. These include advice on general insurance products (ss963B(1)(a) and 963C(a) and r7.7A.12G), life risk insurance products other than certain superannuation-related life policies (s963B(1)(b) and r7.7A.12A), basic banking products where the advice is given by an agent or an employee of an Australian ADI otherwise acting by arrangement with an Australian ADI under the name of the Australian ADI (s963D and r7.7A.12H); execution-only services (s963B(1)(c)), dealing services (r7.7A.12E), brokerage (r7.7A.12D), stamping fees (r7.7A.12B), benefits given by the client (ss963B(1)(d) and 963C(e)), benefits with an educational or training purpose (s963C(c) and rr7.7A.14 and 7.7A.15), benefits for information technology software and support (s963C(d)), and non-monetary benefits with a small value (s963C(b) and rr7.7A.13). This last category applies to a benefit if it is valued at less than $300 and identical or similar benefits are not given on a frequent or regular basis.

Licensees must keep records of small value non-monetary benefits between $100 and $300 that are given to them or their representatives, as well as benefits with an educational or training purpose or for information technology software and support (r7.8.11A).

See generally ASIC Regulatory Guide 246 Conflicted remuneration.

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Ongoing Fee Requirements

Requirements to Charge an Ongoing Fee
•     If personal advice is provided to a retail client by an AFSL holder or representative and there is an ongoing fee arrangement between the client and the licensee or representative, the licensee or representative must give their client an annual fee disclosure statement outlining information about the fees paid and the services received by the client over the previous year (s962G).
•     It is a condition of an ongoing fee arrangement that the arrangement terminates if this obligation is not complied with (s962F). The client may also terminate the arrangement at any time (s962E).

An "ongoing fee arrangement" is essentially one where a fee is paid over a period of more than 12 months (s962A(1) and (2)). However, an arrangement is not an ongoing fee arrangement if: (a) the total of the fees payable under the terms of the arrangement is fixed at the time the arrangement is entered into and specified in the arrangement; (b) the fees payable under the terms of the arrangement are to be paid by instalments over a fixed period specified in the arrangement and can reasonably be characterised as relating to personal advice given to the person before the arrangement is entered into; (c) under the terms of the arrangement, there is no fee payment of which, or the amount of which, is dependent on the amount invested by the person, or the amount in relation to which personal advice is given; and (d) the person cannot opt out of payment of any of the fees payable under the terms of the arrangement (s962A(3)). It is also not an ongoing fee arrangement if the only fee payable under the arrangement is an insurance premium (s962A(4)).

CA ss962K-962N provide that an AFSL holder or representative can only charge an ongoing fee if the client 'opts in' to continue the ongoing fee arrangement every 2 years, unless ASIC is satisfied that the licensee or representative is bound by a code of conduct that, among other things, obviates the need for complying with the opt-in requirement.

Any condition of the ongoing fee arrangement, or any other arrangement, that requires the client to pay an amount on terminating the ongoing fee arrangement is void to the extent that the amount exceeds the sum of: (a) any liability that the client has accrued but not satisfied under the ongoing fee arrangement before the termination; and (b) the costs of the current fee recipient incurred solely and directly because of the termination (s962E(2)).

If an ongoing fee arrangement terminates for any reason and the current fee recipient in relation to the arrangement continues to charge an ongoing fee, they breach s962P, a civil penalty provision.

See generally ASIC Regulatory Guide 245 Fee disclosure statements.

Note again that a condition of a contract or other arrangement is void if it provides that a party to the contract is required or bound to waive any of the obligations above (s960A). It is also a civil penalty provision for a person to enter into a scheme to avoid any of the obligations above (s965).

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Warning Obligations

CA s961H - Obligation to Warn Client if Personal Advice Based on Incomplete or Inaccurate Information
If it is reasonably apparent that information relating to the objectives, financial situation and needs of the client on which the advice is based is incomplete or inaccurate, the adviser must warn the client that:
(a)   the advice is, or may be, based on incomplete or inaccurate information relating to the client's relevant personal circumstances; and
(b)   because of that, the client should, before acting on the advice, consider the appropriateness of the advice, having regard to the client's objectives, financial situation and needs.

A licensee or an authorised representative potentially contravenes a civil penalty provision if an adviser for whom they are responsible fails to comply with this section (ss961K and 961Q). The licensee may also be liable to compensate a client for any loss or damage they may suffer as a result of the contravention (s961M) and subject to various other remedial orders, such as an order declaring a contract void or requiring the repayment of the client's money (s961N).The adviser in question may be subject to a banning order for breaching a financial services law (s920A).

The warning must be given to the client at the same time as the advice is provided and, subject to s961H(3), by the same means as the advice is provided (s961H(2)).

CA s961H(3) provides that if a Statement of Advice is the means by which the advice is provided, or is given to the client at the same time as the advice is provided, the warning may be given by including it in the Statement of Advice. The Statement of Advice must at least contain a record of the warning (see ss947B(2)(f) and 947C(2)(g)).

CA s949A - Obligation to Warn Client About General Advice
A licensee or authorised representative providing general advice to a retail client must warn the client that:
(a)   the advice has been prepared without taking account of the client’s objectives, financial situation or needs;
(b)   because of that, the client should, before acting on the advice, consider the appropriateness of the advice, having regard to the client’s objectives, financial situation and needs; and
(c)   if the advice relates to the acquisition, or possible acquisition, of a particular financial product - the client should obtain a PDS relating to the product or, in the case of CGS depository receipts, an information statement under Division 5C of Part 7.9 and consider the PDS or information statement before making any decision about whether to acquire the product.

Breach of s949A is a criminal offence punishable by fine of up to 100 penalty units and/or 2 years jail for an individual, and a fine of up to 500 penalty units for a body corporate.

The warning must be given to the client at the same time as the advice is provided and by the same means as the advice is provided (s949A(3)).

A financial services licensee must take reasonable steps to ensure that an authorised representative of the licensee complies with these requirements (s949A(5)).

CR r7.7.14 provides that an adviser who is giving general advice in relation to a financial product for which a PDS is not required under CA Part 7.9, does not have to give the warning in (c). CR r7.7.20 similarly provides that the obligation to warn a client about general advice does not apply to billboard, poster or media advertising by a product issuer that complies with s1018 and that indicates that a person should consider whether or not the product is appropriate for the person.

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Dispute Resolution Systems

CA s912A(1)(g) and (2) – Dispute Resolution Systems for Retail Clients
A financial services licensee who provides financial services to retail clients must have a dispute resolution system consisting of:
(a)   an internal dispute resolution procedure that:
  (i)   complies with standards, and requirements, made or approved by ASIC in accordance with the regulations; and
  (ii)   covers complaints against the licensee made by retail clients in connection with the provision of all financial services covered by the licence; and
(b)   membership of one or more external dispute resolution schemes that:
  (i)   is, or are, approved by ASIC in accordance with the regulations; 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 provision of all financial services covered by the licence.

CA s1017G requires certain product issuers and "regulated persons" who are not financial services licensees also to have corresponding internal and external dispute resolution systems for retail clients.

ASIC Regulatory Guide 165
•    

IDR procedures must:

  •     adopt the following definition of 'complaint' in AS ISO 10002-2006 [RG 165.78];
  •    

satisfy the guiding principles in section 4, and comply with sections 5.1, 6.4, 8.1 and 8.2, of AS ISO 10002-2006 [RG 165.82]; and

  •    

meet 2 additional requirements (see below) not in AS ISO 10002-2006 [RG 165.125].

•     IDR procedures need to be documented. This includes setting out in writing:
  •     the procedures and policies for:
    •     receiving complaints or disputes;
    •     investigating complaints or disputes;
    •     responding to complaints or disputes within appropriate time limits;
    •     referring unresolved complaints or disputes to an EDR scheme;
    •     recording information about complaints or disputes;
    •     identifying and recording systemic issues;
  •     the types of remedies available for resolving complaints or disputes; and
  •     internal structures and reporting requirements for complaint or dispute handling.
  You should provide a copy of the procedures to all relevant staff. A simple and easy-to-use guide to the procedures should also be made available to consumers, either on request or when they want to make a complaint or dispute [RG 165.126-129].
•     For a dispute resolution system to be fully effective, you need to establish appropriate links between individual IDR procedures and the relevant EDR scheme for those complaints or disputes that you cannot resolve directly. Your IDR procedures must therefore provide that if a complaint or dispute has been through the IDR procedures but remains unresolved, or is not resolved within the appropriate time limits, the relevant complaints or disputes handling staff will:
  •     inform the complainant or disputant that they have a right to pursue their complaint or dispute with an EDR scheme; and
  •     provide details about how to access the relevant EDR scheme [RG 165.130].

Click here for a copy of ASIC Regulatory Guide 165 Licensing: Internal and external dispute resolution.

The regulations provide that when making or approving standards or requirements for IDR procedures, ASIC must take AS ISO 10002-2006 Customer satisfaction – Guidelines for complaints handling in organizations into account, as well as any other matter it considers relevant: see r7.6.02(1).

AS ISO 10002-2006 section 5.1 requires an organisation's top management to be actively committed to effective and efficient complaints handling. This commitment should be reflected in the definition, adoption and dissemination of policy and procedures for the resolution of complaints. It should also be shown by the provision of adequate resources, including training.

Section 6.4 requires top management, in order to ensure that the complaints handling process operates effectively and efficiently, to assess the need for resources (eg personnel, training, procedures, documentation, specialist support, materials and equipment, computer hardware and software and finances) and provide them.

Section 8.1 requires an organisation to record the performance of its complaints handling process. This includes establishing and implementing procedures for recording complaints and responses.

Section 8.2 requires complaints to be classified and then analysed to identify systematic [sic query "systemic"], recurring and single incident problems and trends, and to help eliminate the underlying causes of complaints.

ASIC does acknowledge in RG 165.80 that applying the definition of 'complaint' in AS ISO 10002-2006 may result in increased administrative burdens and compliance costs in relation to capturing and maintaining records of minor expressions of dissatisfaction. Accordingly, it says that where a complaint or dispute (except for a complaint or dispute relating to hardship, a declined insurance claim, or the value of an insurance claim) is resolved to the customer’s complete satisfaction by the end of the 5th business day after the complaint or dispute was received, a licensee will not be required to apply the full IDR process.

AS ISO 10002-2006 - Definition of Complaint

Complaint = an expression of dissatisfaction made to an organisation, related to its products or services, or the complaints handling process itself, where a response or resolution is explicitly or implicitly expected.

The definition of "complaint" in AS ISO 10002-2006 is far superior to the former definition in AS 4269-1995, which used to define "complaint" as any expression of dissatisfaction with a product or service offered or provided.

AS ISO 10002-2006 - Guiding Principles
•     Visibility - information about how and where to complain should be well publicised to customers, personnel and other interested parties.
•     Accessibility - the process should be easily accessible to all complainants. This includes making clear and easily understood information available about the process and providing assistance to make a complaint.
•     Responsiveness - complaints should be addressed promptly in accordance with their urgency.
•     Objectivity - complaints should be addressed in an equitable, objective and unbiased manner.
•     Charges - should be free of charge to complainant.
•     Confidentiality - personally identifiable information about the complainant should be available if needed to resolve a complaint but otherwise should be actively protected from disclosure.
•     Customer-focussed approach.
•     Accountability - should be clearly established.
•     Continual improvement - a permanent objective.

As mentioned above, ASIC requires a licensee's internal dispute resolution procedures to satisfy these guiding principles.

ASIC Regulatory Guide 139
•     Provides guidance about how ASIC approves external complaints resolution schemes operating in the financial system.
•     External complaints resolution schemes currently approved by ASIC:
  •     Financial Ombudsman Service Ltd (FOSL) - a merger of the former Financial Industry Complaints Service, Banking and Financial Ombudsman Service, Insurance Ombudsman Service, the Credit Union Dispute Resolution Centre and Insurance Brokers Disputes Ltd that covers most licensees.
  •     Credit Ombudsman Service Ltd (COSL) - credit industry.

Click here for a copy of ASIC Regulatory Guide 139 Approval of external complaints resolution schemes.

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Compensation Arrangements

CA s912B - Compensation Arrangements for Retail Clients
A financial services licensee who provides financial services to retail clients must have arrangements for compensating those clients for loss or damage suffered because of breaches of Chapter 7 by the licensee or its representatives that:
(a)   if the regulations specify requirements that are applicable to all arrangements or to arrangements of that kind - satisfy those requirements; or
(b)   are approved in writing by ASIC.

See generally ASIC Regulatory Guide 126 Compensation and insurance arrangements for AFS licensees, which outlines ASIC's policy for administering the compensation and professional indemnity insurance requirements for licensees providing financial services to retail clients.

CR r7.6.02AAA – Approved Compensation Arrangements
Unless exempted, a financial services licensee must hold professional indemnity insurance cover that is adequate, having regard to:
(a)   the licensee’s membership of any schemes mentioned in s912A(2)(b), taking account of the maximum liability that has, realistically, some potential to arise in connection with:
  (i)   any particular claim against the licensee; and
  (ii)   all claims in respect of which the licensee could be found to have liability; and
(b)   relevant considerations in relation to the financial services business carried on by the licensee, including:
  (i)   the volume of business;
  (ii)   the number and kind of clients;
  (iii)   the kind, or kinds, of business; and
  (iv)   the number of representatives of the licensee.

Before ASIC approves alternative compensation arrangements under s912B(2)(b), it is required to have regard to the same matters (r7.6.02AAA(2)).

General and life insurance companies and ADIs regulated by APRA, and certain related bodies corporate guaranteed by them, are exempt from these requirements (r7.6.02AAA(3)).

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Consequences of Breach

Criminal Offences
•     Various criminal offences in individual sections in Part 7.7 (see ss1311 and 1312 and schedule 3) plus additional offences in ss952A-952M – punishable by fines of up to 200 penalty units and/or 5 years jail for individuals and 1,000 penalty units for bodies corporate. These include a failure to give a required disclosure document, giving a disclosure document that does not comply, giving a disclosure document out of time, giving a defective disclosure document, failure to rectify a defective disclosure document and so on.
•     Some due diligence defences (eg ss952E(5), 952G(8)).
•     It is a defence to a charge for failing to provide a disclosure document if there was no reasonable opportunity to do so, but that does not apply if you have had a reasonable opportunity to make, but have not made, reasonable enquiries of the client to obtain an address or fax number for service (s940B).

 

CA s953B(1) – Situations Where Civil Liability Arises
Civil liability may arise in the following situations:
(a)   a person who is required to give a client a disclosure document or statement under Part 7.7 does not give the client anything purporting to be the required disclosure document or statement by the time they are required to do so;
(b)   a person:
  (i)   who is required to give a client a disclosure document or statement under Part 7.7 gives a client one that is defective; or
  (ii)   who is a financial services licensee gives, or makes available to, a client a FSG or a Supplementary FSG that is defective, reckless as to whether the client will or may rely on the information in it; or
(c)   a person contravenes ss949A or 949B.

For these purposes, "disclosure document" means a FSG, SFSG, SOA, ROA required by s946B(3A) or information or a statement required by ss941C(5), 941C(7), 941D(2), 946AA(5), 946B(3), 946B(6), 946B(8), 946C(2) or 946C(7A)(c) (s953A(1), as modified by CR rr7.7.10AF and 7.7.10AG). A disclosure document is "defective" if it contains a misleading or deceptive statement or it omits material that it is required to include under the relevant content requirements in the Corporations Act (s953A(1)).

CA s953B(2) – Right of Recovery
In such situations, if a person suffers loss or damage:
•     if (a) above applies - because the client was not given the disclosure document or statement that they should have been given;
•     if (b) above applies - because the disclosure document or statement the client was given was defective; or
•     if (c) above applies - because of the contravention referred to in that paragraph;
that person may recover the amount of the loss or damage by action against the, or a, liable person, whether or not that person (or anyone else) has been convicted of an offence in respect of the matter referred to in (a), (b) or (c).

The action must be commenced within 6 years after the day on which the cause of action arose (s953B(5)).

CA s953B(3) – Who is Liable?
The, or a, liable person is:
•     if the person first-referred to in (a), (b) or (c) above is a financial services licensee - that person;
•     if the person first-referred to in (a), (b) or (c) above is an authorised representative of only one financial services licensee - that financial services licensee; or
•     if the person first-referred to in (a), (b) or (c) above is an authorised representative of more than one financial services licensee:
  •     if, under the rules in s917C, one of those licensees is responsible for the person’s conduct - that licensee; or
  •     if, under the rules in s917C, two or more of those licensees are jointly and severally responsible for the person’s conduct - each of those licensees.

The first bullet point above, in so far as it relates to liability under s953B(1)(b) – defective disclosure statements - is subject to CA s953B(4). This latter section provides that if the liability relates to giving a defective disclosure document and an alteration was made to the disclosure document before it was given to the client which made the disclosure document defective, or more defective than it would otherwise have been, and which was not made by, or with the authority of, the licensee, then, so far as a person has suffered loss or damage because the disclosure document was defective because of the alteration, the liable person is the person who made the alteration, rather than the licensee.

For the purposes of the third bullet above, s953B(3A) provides that s917C is taken to apply, despite s917F, and s917D is taken not to apply.

CA s953B(6) – Due Diligence Defence
A person is not liable under s953B(2) in a situation described in s953B(1)(b) above if the person took reasonable steps to ensure that the disclosure document or statement would not be defective.

To attract this defence you would need a documented process of review and verification. This could be a role for the Compliance function but it is more likely to be a role for inhouse or outside legal counsel.

CA s953C – Other Court Orders
The court dealing with an action under s953B(2) may, in addition to awarding loss or damage and if it thinks it necessary in order to do justice between the parties:
•     make an order declaring void a contract entered into by the client referred to in that section for or relating to a financial product or a financial service;
•     if it makes an avoidance order - make such other order or orders as it thinks are necessary or desirable because of that order, including (without limitation) an order for the return of money paid by a person and/or an order for payment of an amount of interest specified in, or calculated in accordance with, the order.

 

CA s951A - Part Cannot be Contracted out of
A condition of a contract for the acquisition of a financial product, or for the provision of a financial service, is void if it provides that a party to the contract is:
(a)   required or bound to waive compliance with any requirement of Part 7.7; or
(b)   taken to have notice of any contract, document or matter not specifically referred to in an FSG, SOA or other document given to the party.

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