Download Refinements to Financial Services Regulation

INFORMATION PACKAGE
REFINEMENTS TO FINANCIAL SERVICES REGULATION
“EFFECTIVE COMMUNICATION
INFORMATION TO CONSUMERS”
OF
FINANCIAL
SERVICES
An Australian Government initiative to promote effective communication with consumers, so they
can make well-informed decisions about their financial future, and to reduce the compliance burden.
The financial services regulatory framework was substantially amended by the introduction
of the Financial Services Reform Act 2001 (now contained in Chapter 7 of the Corporations Act
2001), which came into full effect on 11 March 2004.
There is strong community support for the improvements to the regulatory framework and
standards brought about by this reform to financial services regulation (FSR). However, in
light of stakeholders’ day-to-day experience with the legislation, it became clear that some
aspects of the regulation of financial services would benefit from refinement to improve their
practical operation.
The intention underlying the refinements is to:
• ensure that consumers receive information that is relevant to their needs;
• reduce the compliance burden on industry; and
• clarify the intent of the legislation that applies to the financial services industry.
An important focus of the refinements has been on disclosure to ensure that the original
intent of the reforms, to assist consumers in making their own well-informed decisions about
financial services, was delivered on. The Regulations encourage the production of disclosure
documents that have less duplicated information and are more directly relevant to
consumers’ needs. The Regulations also provide for more simple oral disclosure and
streamlined written disclosure in relation to basic deposit products and general insurance
products.
The Regulations are also designed to reduce the compliance burden on industry and to
provide greater certainty as to how industry is to comply with its technical obligations under
the law.
IMPORTANT NOTICE
The refinements referred to in this document are contained in Corporations Amendment
Regulations 2005 No. 5 (the Regulations) that were made on 15 December 2005 and
Australian Securities Investments Commission (ASIC) guidance and/or Class Order relief.
FINANCIAL SERVICES REGULATION (FSR) REFINEMENTS 2005
INTRODUCTION/BACKGROUND
The refinements to FSR have been managed by the Hon Chris Pearce MP, Parliamentary
Secretary to the Treasurer (PST). This has been an extensive process and has involved
detailed consultation between the Australian Securities and Investments Commission
(ASIC), industry stakeholders, consumer representatives and the Australian Treasury.
At the direction of the Treasurer, in mid-August 2004, the Financial Sector Advisory Council
(FSAC) conducted a survey of 22 financial industry representative bodies seeking
information on their members’ experience with the FSR regime since the introduction of the
Financial Services Reform Act 2001. FSAC reported its findings to the Treasurer early in 2005.
Upon the appointment of the new PST in late October 2004, various stakeholders made
representations outlining concerns and issues with FSR. It became clear to the PST that
action was necessary in order to improve the operation and consistency of the requirements
under FSR.
Taking into account the FSAC report and direct industry feedback, the PST immediately
established a working group. This group, led by the PST, was responsible for identifying
improvements in the regulation of financial services.
The PST, in consultation with Treasury and ASIC, developed a proposals paper which was
released for consultation on 2 May 2005. The paper set out 25 proposals for refinements to
FSR — of these, 18 involved proposed changes to the Corporations Regulations, while the
remaining 7 would be implemented by ASIC guidance and/or Class Order relief.
The majority of the refinements relate to the disclosure requirements of the legislation, and
focus on ways to ensure that disclosure (both written and oral) operates effectively as an
information tool for consumers, rather than a means for financial service providers to
demonstrate compliance with the legislation.
These refinements are collectively designed to yield a significant return to the original intent
of FSR — providing consumers with information which is relevant, reliable and required to
make informed financial decisions.
On 11 October 2005, the PST released an exposure draft of Corporations Amendment
Regulations designed to implement the refinement proposals. Comments on these draft
Regulations, made by industry and consumer representatives, assisted to improve the
workability of the regulations and to ensure that the refinements achieve their intended
outcomes.
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SUMMARY OF FINAL PROPOSALS
The refinements are being made in the following areas:
Streamlined Disclosure
A principal focus of the refinements is better communication with consumers, through
allowing product information and financial advice to be provided to consumers when they
feel the need for it rather than expecting them to digest a large volume of material upfront.
Particular attention was paid to adjusting the content requirements for the various disclosure
documents to move the financial services industry away from the production of excessively
lengthy and complex documents (or, in the case of oral disclosure, excessively lengthy verbal
‘scripts’). Changes to the rules allow primary attention to be paid to the legislation’s
requirement for information to be presented to consumers in a ‘clear, concise and effective’
manner.
Operational Efficiency Measures
In addition, the refinement regulations are designed to address specific practical problems
that have been encountered in the areas of:
•
retail/wholesale client distinction;
•
provision of secondary services;
•
general advice definition;
•
jurisdictional issues;
•
authorised representatives;
•
staff training; and
•
non-cash payment facilities.
In addition to the proposals implemented by ASIC, the Corporations Amendment
Regulations, which were made on 15 December 2005, include amendments that:
•
allow service providers to tailor, reduce duplication in and reduce the length of
Financial Services Guides (FSGs);
•
reduce the frequency in which a Statement of Advice (SoA) is required to be given to a
client;
•
allow product issuers the option of producing a ‘short form’ Product Disclosure
Statement (PDS);
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•
reduce the length of oral disclosures required by the legislation in relation to sales, for
example, by telephone;
•
exempt basic deposit products (for example, savings accounts) from the PDS
requirements;
•
tailor the disclosure requirements for general insurance products;
•
make changes to the retail/wholesale client definition — the definition is used under
FSR to specify which clients require additional consumer protections;
•
exempt secondary service providers (financial service providers who do not have a
direct relationship with a client but provide their services to the client through another
service provider) from the need to provide an FSG in certain circumstances;
•
clarify that certain types of advice about financial products do not attract the licensing
and disclosure requirements of the Act;
•
clarify the jurisdictional reach of financial services regulation;
•
make changes to the sub-authorisation requirements — under the legislation, licensees
are able to authorise representatives to act for them, who can, in certain circumstances,
sub-authorise other representatives; and
•
make technical and other amendments to the Act.
In addition to proposals which were implemented via Regulations, the other proposals were
implemented by guidance and relief issued by ASIC.
THE PROPOSALS IN DETAIL
A summary of the proposals and how they are implemented follows.
Financial Services Guide (FSG)
The purpose of this refinement is to facilitate the provision of more specific and concise
information to consumers by encouraging the production of FSGs that are shorter and more
directly relevant to consumer needs. The refinements are also intended to reduce duplication
of information in FSGs and other disclosure documents.
•
Licensees and authorised representatives may tailor their FSGs to those financial
services or products they are likely to be providing to a client.
–
•
Therefore, FSGs need not contain information on all of the services that the
licensee is authorised by its licence to provide, or an authorised representative is
authorised to provide on behalf of its authorising licensee(s).
If the product issuer’s PDS duplicates information the service provider is required to
include in its FSG, the service provider is exempt from the need to supply a complete
FSG.
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•
The FSG need only contain brief, generic information about remuneration and conflicts
of interest.
Statement of Advice (SoA)
The purpose of this refinement is to ensure that SoAs are not ignored by consumers as a
result of repeating previously provided information.
•
An adviser will not have to give the client an SoA for further advice where the client
has previously been given an SoA, and there are no significant changes in the client’s
personal circumstances or the basis of the advice since that SoA was given.
–
Instead the adviser will need to keep a record of the advice for seven years and
provide it to the client, if requested.
In addition to regulatory amendments, ASIC issued further guidance on SoAs, including
releasing an example SoA.
•
ASIC published an example SoA illustrating its interpretation of ‘clear, concise and
effective’ advice and disclosure.
–
•
The example SoA was developed on the basis of a hypothetical financial
planning scenario developed in consultation with financial planning experts. It
deals with personal advice about personal insurance, investing in managed
funds and basic deposit products.
The example SoA provides some important insights into what ASIC thinks is
important in SoAs. These are:
–
length – the example SoA is only 12 pages long;
–
there are no 'weasel words' (for example, lengthy disclaimers and exclusions);
–
it is written in simple, plain English;
–
there is adequate disclosure of conflicts, fees and commissions; and
–
there is a clear explanation of the scope and limitations of the advice.
Short-Form Product Disclosure Statement (PDS)
The purpose of this refinement is to provide consumers with more effective disclosure by
avoiding information overload that masks core information about a financial product.
•
Product issuers will have the option of giving retail clients a Short-Form PDS that
contains a summary of the information required to be included in the PDS.
•
It is expected that PDSs will predominantly exist in electronic form with formats, such
as PDF files, that allow for downloading and printing.
•
Incorporation by reference of PDS information — where an express statement is made
in the Short-Form PDS, a client is deemed to have been provided all the information in
the PDS.
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Oral Disclosure
The purpose of this refinement is to ensure that the information that is required to be
disclosed orally is simpler and more easily understood by consumers.
•
For a financial product with a cooling-off period, the amendments will further reduce
the oral disclosure requirements.
•
As there is a cooling-off period, consumers will be able to read further information
about the product in the PDS that they subsequently receive and still be able to return
the product if they choose.
•
The regulated person will also be required to ask the client if they would like further
information about the product.
General Advice Warning
The purpose of this refinement is to provide consumers with simpler general advice
warnings that are more meaningful and more consistently presented in advertisements.
•
ASIC Class Order CO 05/1195 allows providers of oral general financial product
advice to give a shorter, simpler general advice warning.
•
ASIC Class Order CO 05/835 provides relief for product issuers who give general
financial product advice in advertisements.
–
The effect is that no FSG or general advice warning will be required where
product issuers give general financial product advice in advertisements in the
media or on billboards or posters. Instead, product issuers need only:
:
include a statement in their advertisement that a person should consider
whether the financial product is appropriate for them; and
:
comply with the advertising disclosure requirements in section 1018A or
section 734 of the Corporations Act 2001 (as applicable to the kind of offer
document).
Basic Deposit Products (BDPs)
The purpose of this refinement is to avoid providing consumers with redundant information
whilst ensuring that they can still obtain the information they require about BDPs, such as
fees and costs.
•
BDPs are exempted from the written disclosure requirements. This exemption also
applies to non-cash payment facilities related to BDPs, and travellers’ cheques.
•
Clients must be told about whether there are costs and fees associated with the product
and provided with information on these fees and costs, if requested.
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Cash Management Trusts (CMTs)
•
A cash management trust interest is included in the exemptions from the requirements
to provide a written FSG and SoA.
•
A PDS continues to be required to inform consumers about the features of a CMT.
General Insurance PDSs
The purpose of this refinement is to create PDSs for general insurance products that are
easily understood by consumers and are better matched to the accompanying insurance
policy statement. The refinements are also intended to minimise the provision of PDSs on
renewal, where the product has not materially changed.
•
Certain PDS content requirements that are not relevant for general insurance are
‘turned off’, so that FSR disclosure complements contractual disclosure by
harmonisation with the Insurance Contracts Act 1984 disclosure requirements.
•
It is made clear that insurers can use a supplementary PDS on renewal of an insurance
contract.
•
Certain classes of general insurance are exempted from the SoA disclosure
requirements.
Retail / Wholesale
The purpose of this refinement is to provide for more consistent application of the
retail/wholesale client definitions to take into account the way that consumers structure
their personal and business affairs. The refinements also aim to provide greater certainty on
the application of the professional investor test and reduce redundant paperwork.
•
Assets or income of a trust or company controlled by an investor can be aggregated
with the assets or income owned or received by the investor directly, for the purposes
of determining whether the investor or the controlled trust or company is a wholesale
client.
•
The definition of professional investor is expanded to include a person with a minimum
of $10 million in gross assets.
•
The period for renewal of accountants’ certificates is extended from 6 to 24 months.
Secondary Services
The purpose of this refinement is to reduce any excessive disclosure provided to consumers
where both intermediaries and secondary service providers are involved in the provision of
a financial service to a retail client.
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•
Secondary service providers will be exempt from the requirement to give a retail client
an FSG where they have an agreement with the intermediary that the intermediary will
provide the FSG to the client or inform the client how to obtain it.
General Advice Definition
The purpose of this refinement is to allow consumers to make general inquiries about
products without responses to such inquiries triggering the general advice requirements.
•
Advice that is not personal advice and is not about a particular financial product or an
interest in a particular financial product, and:
–
is not intended to influence another person; or
–
could not reasonably be regarded as being intended to influence; and
–
by giving the advice, neither the adviser, nor an associate of the adviser, receives
any remuneration or other benefit related to the advice
will not constitute the provision of a financial service.
In addition to regulatory amendments, ASIC has issued guidance to clarify that advisers do
not necessarily provide personal advice merely because they have some personal
information about a retail client.
•
The guidance is provided in an answer to a frequently asked question (FAQ) QFS 158
‘Can I give a client general advice about a financial product if I have information about
their personal circumstances?’.
–
QFS 158 provides further explanation about when advice is general, rather than
personal. The FAQ provides seven examples to help people understand the
regulatory approach ASIC proposes to take on advice given in a variety of
different scenarios.
ASIC has also issued guidance and relief to promote the provision of basic online calculators.
•
ASIC has provided relief for providers of superannuation calculators relating to
licensing, conduct and disclosure requirements, and guidance in relation to the
conditions associated with the relief.
–
Superannuation calculators are electronic facilities that assist users to estimate
the total value of their superannuation at a future point in time or the estimated
level of regular contribution required to reach a target value.
–
The relief, which is provided under Class Order CO 05/611, means that
providers of superannuation calculators who meet certain minimum conditions
do not require an Australian financial services licence with an advice
authorisation and, if already licensed, do not need to meet the disclosure
requirements in Part 7.7 of the Corporations Act 2001.
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Jurisdictional Issues
The purpose of this refinement is to remove unintended applications of Australian financial
services requirements to foreign financial service providers and to clarify the requirements
as they apply to Australian consumers.
•
Foreign financial service providers will be exempt from the need to obtain an
Australian financial services licence in certain defined situations.
•
Domestic licensees will be exempted from the disclosure requirements when dealing
with overseas clients.
Authorised Representatives
The purpose of this refinement is to increase access to financial services for consumers by
extending the ability to sub-authorise representatives.
•
Any authorised representative (however structured) appointed by a licensee will be
permitted to ‘sub-authorise’ an individual to provide financial services on behalf of the
licensee.
•
This will therefore permit sub-authorisation by authorised representatives structured
as partnerships, trusts or sole traders.
•
Sub-authorised individuals will not be able to further sub-authorise.
In addition to the regulatory amendments, ASIC has issued relief for licensees from the
authorisation requirements for distributors of general insurance products.
•
Class Order CO 05/1070 allows Australian financial services licensees the option to
appoint people to deal in general insurance products on their behalf, without having to
appoint them as authorised representatives.
•
Under the relief, the licensee will be responsible for the activities of distributors they
appoint and the distributors must inform retail clients who they act for, what
remuneration they get and how the clients can access the licensee's dispute resolution
system.
Staff Training
The purpose of this refinement is to facilitate wide access to financial services for consumers
by clarifying the application of the minimum training requirements for people who only
provide advice on BDPs and related non-cash payment facilities.
•
ASIC has responded to industry concerns that training requirements in Policy
Statement 146 for persons giving general or personal advice on BDPs should be made
more flexible. In particular, the update to PS 146 makes it clear that:
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•
–
it is no longer mandatory for training courses for advisers on BDPs to cover the
'generic knowledge' requirements contained in PS 146;
–
training on BDPs need only cover the particular ‘specialist knowledge’ and ‘skill
requirements’ in PS 146 that are relevant to the adviser's activities; and
–
there might be situations where continuing training is not necessary for all
persons who advise on BDPs. The licensee will first need to consider whether
continuing training is required. It may be that there is no need if, for instance, the
products have not changed.
The updated policy gives licensees greater flexibility to tailor training to suit their BDP
advisory activities, without the cost of unnecessary mandatory generic knowledge
training.
Non-Cash Payment Facilities
The purpose of this refinement is to clarify that some non-cash payment facilities may be
offered to consumers without the need for compliance with some or all requirements of
financial services regulation.
•
ASIC has adopted a flexible approach to regulating non-cash payment facilities in its
recently released Policy Statement 185 on non-cash payment facilities. The policy
outlines ASIC’s general approach, the factors that will be taken into account in
considering applications for individual or class order relief, and the class order relief
already granted.
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