Topic 5: Regulatory framework II

Banning order

A banning order is a written order by ASIC that prohibits a person from providing any financial services or specified financial services in specified circumstances or capacities. ASIC has the power under section 920A of the Corporations Act to make a banning order against a person if: • the person has not complied with their general obligations under section 912A (discussed above) • ASIC has reason to believe that the person will not comply with their general obligations under section 912A • ASIC suspends or cancels an AFSL held by the person • the person becomes an insolvent under administration • the person is convicted of fraud • the person has not complied with a financial services law, or • ASIC has reason to believe that the person will not comply with a financial services law. It can only make a banning order after allowing the person to make submissions in writing, or be heard at a private hearing conducted by an ASIC delegate (section 920A(2)); or if circumstances allow ASIC to suspend or cancel an AFSL immediately, or if serious fraud is involved (section 920A(3)). A hearing under s920A(2) is a 'protective hearing', meaning that the exercise of ASIC's power is intended to protect the public, especially investors and consumers. The hearing is a 'true administrative function', not judicial, and therefore traditional court procedures, including the rules of evidence, do not apply; the hearing must, however, observe the rules of natural justice (section 59, Australian Securities and Investments Commission Act 2001 (Cth)), and the requirements of procedural fairness. ASIC has published a hearings practice manual (RG 8) to explain the workings of an administrative hearing. Any order made following a hearing, or submissions, may prohibit the person against whom it is made from providing a financial service permanently or for a specified period, unless ASIC has reason to believe that the person is not of good fame or character. It is an offence to breach a banning order with a maximum penalty of $4500 ($22,500 for a body corporate) and/or imprisonment for six months.

Related body corporate

A body corporate will be a 'related body corporate' of another body corporate where the first body corporate is: • a holding company of the other body corporate • a subsidiary of another body corporate, or • a subsidiary of a holding company of another body corporate.

General advice given by financial product issuer

A financial product issuer is not taken to provide a financial service (of providing general financial product advice) if: • the issuer gives advice to another person about a particular financial product or class of financial products issued by the issuer, an interest in a particular financial product or a class of financial products issued by the issuer • the advice is not personal advice • the advice is given to the person at the same time as the issuer: - advises the person that the issuer is not licensed to provide financial product advice in relation to the product, class or interest, as the case may be - recommends to the person that the person obtain a product disclosure statement, if appropriate, and read it before making a decision to acquire the product or a product from the class of products, as the case may be - if it is advice about the offer, issue or sale of a financial product, notifies the person about the availability or otherwise of a cooling-off regime that applies in respect of the acquisition of the product, a product from the class of products or an interest in a product (reg 7.1.33H, Corporations Regulations). Example: Product brochures This exemption may apply in relation to information in a product brochure (or similar marketing document) that would otherwise be treated as containing general financial product advice.

Sophisticated investors not 'retail client'

A financial product, or financial service in relation to the product, is not provided to a person as a retail client if: • the product is not a general insurance product or a superannuation product • the financial product or financial service is not provided for use in connection with a business • the licensee is satisfied on reasonable grounds that the client has previous experience in using financial services and investing in financial products that allows the client to assess: - the merits of the product or service - the value of the product or service - the risks associated with holding the product - the client's own information needs, or - the adequacy of the information given by the licensee and the product provider. The licensee must give the client a written statement as to the reasons for being satisfied about these matters and the client must sign an acknowledgement (section 761GA, Corporations Act). This certification method does not apply to general insurance products, superannuation products or retirement savings accounts, or where the product is provided in connection with a business. A 'wholesale client' is any client who is not a retail client (section 761G, Corporations Act).

Representatives of a licensee

A financial services licensee provides its services to clients through its representatives. Directors and employees of the licensee (or a related body corporate) are defined to automatically be 'representatives' of a licensee. Clearly, licensees will want to make use of others to do business and they can do this by making someone who is not a director or employee of the licensee an 'authorised representative'. A licensee can do business through, and will generally be responsible for the actions of, four kinds of representatives: • a director or employee of the licensee • a director or employee of a related body corporate of the licensee • a provider of the service holds their own AFSL for the provision of the service • an 'authorised representative' of the licensee (as described below). As a general rule, a person cannot provide a financial service in Australia on behalf of another person who carries on a financial services business unless they fit into one of the above categories.

Responsibility for representative's conduct

A licensee is generally held responsible for the conduct of a representative providing financial services under services under its licence where it is conduct: • that relates to the provision of a financial service • on which the client could reasonably be expected to rely • on which the client in fact relied in good faith. If a representative acts as the representative of only one financial services licensee, that licensee is responsible for the conduct of the representative. A licensee is not responsible for the conduct of their representative if: • the conduct is not within authority • the representative disclosed that fact to the client before the client relied on the conduct • the clarity and prominence of the disclosure was such as a person would reasonably require for the purpose of deciding whether to acquire the relevant financial service. Subject to the two circumstances set out below, if a representative is the representative of more than one licensee then all of the licensees are jointly and severally responsible for the conduct, whether or not the representative's conduct is within authority in relation to any of them. The two circumstances follow: • The first is where the representative is representing one licensee only in respect of a particular class of service and the conduct relates to that class of service. In this case, the licensee is responsible for the conduct of that representative whether or not the conduct is within authority. • The second is where the representative is representing more than one of the licensees in respect of a particular class of service and the conduct relates to that class of service, and the representative's conduct is within the authority of one licensee. In that case, the licensee is responsible for the conduct of that representative and if the representative's conduct is within the authority of two or more licensees, then the licensees are jointly and severally responsible for the conduct of that representative. There is a special rule where a representative is the representative of more than one licensee in respect of a particular class of service and engages in conduct relating to that service and a licensee issues or transfers a financial product as a result of the conduct. In those circumstances, the person is taken to have acted within authority in relation to those licensees who issued or transferred a financial product as a result of the conduct. However, the person is not taken to have acted within the authority of those licensees who did not issue or transfer the financial product as a result of the conduct. If a financial services licensee is responsible for the conduct of their representative, the client will have the same remedies against the licensee that the client has against the representative.

What is 'likely to breach'?

A licensee is likely to breach an obligation if, and only if, the licensee is no longer able to comply with the obligation (section 912D(1A), Corporations Act). Example: Likely to breach obligations A licensee may become aware that on a future date its overdraft facility will be closed and it will no longer be able to comply with base level financial requirements. If the licensee does not have an alternative means of meeting the financial requirements at this time, it will become aware that they are likely to breach their obligations in relation to the financial requirements.

Adequate risk management systems

A licensee must, unless the licensee is a body regulated by APRA, have adequate risk management systems (section 912A(1)(h), Corporations Act). If the licensee is regulated by APRA, then a similar obligation will apply under APRA's regulatory regime. This obligation is considered in RG 104. ASIC expects a licensee's risk management systems will: • be based on a structured and systematic process that takes into account the licensee's obligations under the Corporations Act • identify and evaluate risks faced by the licensee's business, focusing on risks that adversely affect consumers or market integrity (this includes risks of non-compliance with the financial services laws) • establish and maintain controls designed to manage or mitigate those risks • fully implement and monitor those controls to ensure they are effective.

Technological & human resources requirements

A licensee needs to have enough technological resources to enable it to: • comply with all of its obligations under the law • maintain client records and data integrity • protect confidential and other information • meet current and anticipated future operational needs. Human resources ASIC expects that a licensee will identify key indicators of inadequate human resources. These key indicators are likely to include: • customer complaints about the quality of customer service or financial product advice • a low ratio of compliance staff to representatives • not enough compliance staff to conduct a periodic (e.g. annual) review of representatives who give personal advice to retail clients • client accounts and interests not being monitored when staff are absent • a large number of inexperienced staff (e.g. staff who have been in the business less than six months) • a large number of vacant positions.

'Carrying on a business'

A person engages in the business of providing financial services where the services are provided as a business in Australia. As explained in RG 36, the business test requires that financial services are provided with 'system, repetition and continuity' rather than, for example, just as a hobby or a favour, or as a one-off transaction. Whether a person intends to profit, or actually profits, from the provision of the services is irrelevant. Furthermore, a person is treated as 'carrying on a financial services business in this jurisdiction' where the person intends to induce people in Australia to use the financial services the person provides, or the actions are likely to have that effect. This generally means that where a financial services provider targets Australians from overseas, by whatever means (including telephone and internet), they will be treated as carrying on a financial services business in Australia. That financial services provider will need a licence and be subject to the obligations that are imposed by that licence in addition to the other obligations discussed in this topic unless they fall within an exemption.

Prospectus versus PDS

A prospectus will be required to offer to issue shares to retail investors under the Chapter 6D Fundraising provisions. A product disclosure statement (PDS) is needed to offer to issue units in a managed fund to retail investors under Chapter 7. In the case of stapled securities (for example a share in the responsible entity of a trust unit stapled to a unit in the trust) it may be necessary to issue a combined PDS/prospectus.

Mitigation

ASIC may take into consideration the licensee's conduct after a breach is reported. It is likely that ASIC will take the following factors into account: • the extent to which the licensee is willing and able to address the consequences of the breach through communication and compensation to those adversely affected • any review and modification of compliance procedures by the licensee to prevent recurrence of the conduct • appropriate disciplining of wrongdoers where the circumstances do not suggest there are more significant compliance issues within the business, or • the extent to which the licensee cooperated with ASIC, including providing ASIC with all information relevant to the underlying breaches and remedial efforts. Example: Mitigating factors A possible mitigating factor that may assist in certain cases is an undertaking to deliver training to relevant persons in the organisation. The training would be targeted specifically at the particular issue that caused the particular breach, with a view to reducing the risk of a recurrence of the breach.

General advice for no remuneration

According to regulation 7.1.33G of the Corporations Regulations 2001, a person is taken not to provide a financial service if he or she gives general advice to another person and: • the advice is not personal advice and is not in relation to a particular financial product • the advice is not intended to influence the other person in making a decision in relation to a particular financial product or could not reasonably be regarded as being intended to have such an influence • by giving the advice neither the person or any associate receives any remuneration or other benefit that is related to the advice given apart from remuneration or other benefit that the person or associate would have received if the advice was not given. This exemption is of limited benefit in practice, but it could, for example, cover an accountant who wished to discuss general financial concepts and strategies with a client, provided there was no advice given or recommendation made on specific financial products.

Authorised representative

An authorised representative may be a natural person, a body corporate, a partnership or a group of individual trustees. One person can be the authorised representative of two or more licensees with the consent of each of those licensees (i.e. cross-endorsements) or where the licensees are related bodies corporate (section 916C(1), Corporations Act). A financial services licensee may give a person (the authorised representative) a written notice authorising the person to provide a specified financial service or financial services on behalf of the licensee (section 916A(1), Corporations Act). The financial services specified may be some or all of the financial services covered by the licensee's licence. The licensee must in turn hold an AFSL covering those services (section 911B, Corporations Act). An authorisation is void to the extent that it purports to authorise a person to provide a financial service that is not covered by the licensee's licence or contrary to a banning order or disqualification order. It is an offence (punishable by a maximum penalty of $18,000 ($90,000 for a body corporate) and/or imprisonment for two years) for a person to give a purported authorisation which is void. An authorisation may be revoked at any time by the licensee giving written notice to the authorised representative. A person must lodge a written notice with ASIC within 15 business days, if the person authorises a representative to provide a financial service.

Person carrying on a financial services business

Anyone carrying on a financial services business in Australia must hold an AFSL unless they fall within an exemption. An understanding of this concept requires knowledge of the meaning of such terms as 'financial services', 'financial product' and 'financial product advice', as well as an understanding of the process of application and cancellation of a licence. A person is taken to provide a financial service if they: • provide financial product advice • deal in a financial product • make a market for a financial product • operate a registered scheme • provide a custodial or depository service. The maximum penalty for not having an AFSL when carrying on a financial services business is $36,000 ($180,000 for a body corporate) and/or imprisonment for two years.

Apply your knowledge 4: Which type of client — different circumstances? Multiplier Funds Management offers George an opportunity to invest in their Multiplier Opportunity Fund. Units in the fund are offered on a partly paid basis where 10% is payable upfront, and additional instalments are payable from time to time. George decides to invest and commits $600,000 to the fund. Discuss whether George is a retail or wholesale client

Apply your knowledge 4: Which type of client — different circumstances? George may be a retail client. As the initial amount payable ($60,000, being 10% of the amount committed) is less than $500,000, George would not be regarded as a wholesale client under the $500,000 or more 'category' of wholesale client.

Breach register & when must a breach be reported?

Breach register The Corporations Act does not require that a licensee keep a breach register. However, ASIC considers that, in practice, licensees will need to use a documented breach register to ensure that there are adequate arrangements in place to comply with the obligation to report significant breaches or likely breaches. When must a breach be reported? A licensee must give a written report to ASIC as soon as practicable and, in any event, within ten business days of becoming aware of either: • the breach — if the breach had already occurred when the licensee discovered it, or • the likely breach — if the licensee becomes aware that it will no longer be able to comply with an obligation before the breach has actually occurred. RG 78 sets out the recommended approach for when a breach must be reported: The reporting period starts on the day you become aware of a breach or likely breach that you consider could be significant. We will administer this requirement as meaning that you become aware of a breach or likely breach when a person responsible for compliance becomes aware of the breach. We expect your internal systems to make the relevant people aware of breaches in a timely and efficient manner... In making your breach report, you should not wait until after: • you have completed all possible avenues of investigation to satisfy yourself whether or not the breach or likely breach is significant; • the breach or likely breach has been considered by your Board of Directors; • the breach or likely breach has been considered by your internal or external legal advisers; • you have rectified (where appropriate), or you have taken steps to rectify, the breach or likely breach; or • in the case of a likely breach, the fact has in fact occurred, since these extended processes may defeat the law's intention for ASIC to be informed of significant breaches as soon as practicable.

Chinese wall

Chinese walls (or information barriers) are a widely-used arrangement to help manage conflicts of interest. 'Information barriers' is the more recent terminology. There is some debate about why the term 'Chinese walls' was first used. One view is that it relates to the Great Wall of China and its effectiveness in separating one side of China from the other. An alternative view is that it refers to the Chinese standing screens which can create a separation where there is no permanent wall in a room. The Federal Court dealt with Chinese walls in some detail in the case of ASIC v Citigroup Global Markets Australia Limited (2007) FCA 963. In an article on this case, Andrew Lumsden and Victoria Bridgen (2007) made the following practical points: To be effective, Chinese walls should include: • the physical separation of departments • a recurring educational program • procedures for dealing with situations if the wall should be crossed and the maintaining of proper records should this occur • monitoring by compliance officers • disciplinary sanctions for breaches • policies to allow internal reviews to investigate whether inside information had leaked. In addition to the matters raised above, good practice in this area should include: • maintaining formal, documented policies and ensuring they are regularly reviewed • ensuring that insider lists are complete so that any leak enquiries can be expedited • implementing a policy stipulating that contact with the media is only handled by a single individual to ensure consistency in responses • conducting internal audit reviews • maintaining procedures for staff to 'whistle blow' when they witness sensitive information being handled inappropriately.

Conflicts of interest

Circumstances where some or all of the interests of people (clients) to whom a licensee (or its representative) provides financial services are inconsistent with, or diverge from, some or all of the interests of the licensee or its representatives. This includes actual, apparent and potential conflicts of interest. RG 181 provides the following examples of conflicts of interest: (a) Licensee A has an interest in encouraging client B to invest in higher risk products that result in high commissions, which is inconsistent with client B's personal desire to obtain a lower risk product. (b) Licensee C has an interest in maximising trading volume by its clients (including client D) in order to increase its commission revenue, which is inconsistent with client D's personal objective of minimising investment costs. (c) Licensee E is the trustee of a retail superannuation fund and has an interest in maximising the fees it earns from managing the fund (and therefore maximising the returns to its shareholders), but the beneficiaries have an interest in minimising the fees they pay as members of the fund. The Act does not require the impossible — i.e. to prevent all conflicts of interest. It requires that they be adequately managed. Most conflicts of interest can be managed by a combination of internal controls and disclosure. Where a conflict cannot be managed with these methods, then the licensee must avoid the conflict or refrain from providing the relevant financial service. It is important that policies are not simply stated but are implemented and reviewed. As Smith J said in Rahmat Ali v Hartley Poynton Ltd (2002) VCS 113: Policies, however, are worthless without systems and people in place to enforce those policies by checking from time to time that they are being applied.

Disqualification, Suspension or cancellation of licence

Disqualification ASIC may apply under section 921A of the Corporations Act to the Court for an order or orders in relation to a person if ASIC cancels an AFSL held by the person or makes a banning order that is to operate permanently against the person. The Court may then make: • an order disqualifying the person, permanently or for a specified period, from providing any financial services, or specified financial services, in specified circumstances or capacities, or • any other order the Court considers appropriate. Suspension or cancellation of licence Section 915C of the Corporations Act gives ASIC the power to suspend or cancel an AFSL, after offering the licensee the opportunity to be heard on the matter, in any of the following cases: • the licensee has not complied with their obligations under section 912A • ASIC has reason to believe that the licensee will not comply with their obligations under section 912A • ASIC is no longer satisfied as to whether the licensee, or the licensee's representatives, are of good fame or character • a banning or disqualification order is made against the licensee, or • a banning or disqualification order is made against a representative of the licensee and ASIC considers that the representative's involvement in the provision of the licensee's financial services will significantly impair the licensee's ability to meet its obligations.

Best interests obligations

Division 2 of Part 7.7A of the Corporations Act 2001 incorporates the 'best interests' obligations introduced by the FOFA reforms, which apply to personal advice provided to retail clients. Section 961B(1) requires advice providers that provide personal advice to retail clients (including AFS licensees and their representatives) to act in the best interests of their clients. Section 961B(2) also recognises that clients may seek personal advice that is either broad or narrow in its scope; and that accordingly such personal advice may be 'scaled' — that is, be limited in its scope and 'tailored' to the needs of the client. There are exemptions for advice given in relation to basic banking products (s961B(3)) and general insurance products ( section 961B(4)). Advice provided to clients must be appropriate to the client: section 961G; and if the advice is based on incomplete or inaccurate information, the advice provider must warn the client of this when providing the advice: section 961H. In the event of any conflict between the interests of the client and those of the adviser, section 961J obliges the advice provider to give priority to the client's interests when providing the advice. Section 961L requires an AFS licensee to take reasonable steps to ensure that its representatives comply with the requirements under sections 961B, 961G, 961H and 961J; and AFS licensees that contravene these provisions may be exposed to civil penalties: section 961K (for an overview of civil penalty provisions under the Corporations Act 2001, see Topic 4 at 1.3). Additionally, clients who suffer loss or damage due to breaches of Division 2 of Part 7.7A may take civil actions to seek compensation for such loss or damage: section 961M. In RG 175 'Licensing: Financial product advisers — conduct and disclosure' at Section E 'Acting in the client's best interests and related obligations', ASIC provides guidance (including numerous worked examples) for advice providers to satisfy the requirements of Division 2 of Part 7.7A. Additionally, RG 244 'Giving information, general advice and scaled advice' provides guidance for providing scaled advice to clients in compliance with Chapter 7 of the Corporations Act 2001. In particular, Section E of RG 244 emphasises the importance of clearly communicating to the client the type of service that is, and is not, being provided to the client, and the implications of any limitations in the advice.

Fee disclosure statements and opt-in requirements

Division 3 of Part 7.7A of the Corporations Act 2001 incorporates FOFA reforms regarding the disclosure of on-going fee arrangements (for periods of 12 months or greater) between AFS licensees and their retail clients. AFS licensees and their representatives who enter into or have ongoing fee arrangements with retail clients must provide their retail clients with a fee disclosure statement (FDS) on an annual basis. An FDS must include the following information: • the amount of each ongoing fee paid by the client under the on-going fee arrangement in the previous year • information about the services that the client was entitled to receive under the on-going fee arrangement during the previous year • information about the services that the client actually received under the on-going fee arrangement during the previous year. RG 245 'Fee disclosure statements' contains guidance for the preparation, content and provision of fee disclosure statements. Section 962K requires AFS licensees that enter into ongoing fee arrangements with retail clients to renew their clients' agreement to pay ongoing advice fees every two years (section 962L defines the 'renewal notice day' as the second anniversary of the day in which the ongoing fee arrangement was entered into, or last renewed). This is known as the 'opt-in requirement'. On-going fee arrangements will terminate if the client notifies the AFS licensee that they do not wish to renew the arrangement: section 962M; or if the client does not notify the AFS licensee that the client wishes to renew the arrangement within the renewal period, the arrangement terminates at the end of a further 30 days after the end of the renewal period for the arrangement: section 962N. If an on-going fee arrangement is terminated, the AFS licensee must not continue to charge on-going fees: section 962P. ASIC may grant relief from the 'opt-in' requirement if it is satisfied that the AFS licensee or its representative is bound by an approved code of conduct that 'obviates the need' for complying with the opt-in requirement: s962CA. Section E 'Approving codes under section 962CA' of RG 183 'Approval of financial services sector codes of conduct' contains guidance about how ASIC will apply its existing code approval guidelines to codes that obviate the need for compliance with the opt-in requirement.

External dispute resolution

External dispute resolution (EDR) refers to the process of bringing a dispute with a banking, credit or financial services industry participant to an independent body for evaluation and resolution of the dispute. As consumer rights have come to the fore in recent years, and as almost all Australians regularly interact with banking and financial services bodies, the role of EDR bodies is of ever increasing importance. On this basis, membership of an EDR scheme has been a prerequisite for all AFSL and credit licence holders since the Financial Service Reform Act 2001 introduced the obligation to section 912A of the Corporations Act. An applicant for an AFSL must: • provide ASIC with proof of membership of an external dispute resolution scheme or schemes, including the date of membership • provide ASIC with details of the position in the organisation with primary responsibility for dealing with the external dispute resolution scheme(s). A licensee must provide ASIC with a written report as soon as practicable, and no later than three days, after becoming aware that the status of its external dispute resolution scheme membership has changed (e.g. do not renew membership, change schemes).

EDR schemes

FICS, the BFSO and the IOS merged to create the Financial Ombudsman Service (FOS) in 2008. The following year, the Credit Union Dispute Resolution Centre and the Insurance Brokers Disputes Limited also joined FOS. In 2004, the MIOS changed its name to the Credit Ombudsman Service Limited, and later in 2014 renamed itself the Credit & Investments Ombudsman (CIO). By numbers, CIO has a larger membership base than FOS (22,000 against 13,500), however the major banks and insurers are members of FOS rather than CIO. A third EDR body, the Superannuation Complaints Tribunal handles disputes concerning superannuation, annuities and life insurance. As a tribunal it is an ASIC-approved EDR scheme. Pursuant to the 2017 review of the financial system external dispute resolution and complaints framework (Australian Government, 2017), the government has chosen to implement the recommendation that the three EDR bodies be amalgamated into a single complaints-handling body; to be known as the Australian Financial Complaints Authority (AFCA). This will provide a 'one stop shop' for consumers, as well as improving oversight of the complaints process. AFCA will still maintain an industry-funded model and is commencing operations in November 2018 through an initial rebranding of FOS.

Compensation arrangements & PI insurance

Financial services licensees providing a financial service to retail clients must have arrangements in place to ensure that persons who successfully claim losses suffered due to breaches of the licensee's obligations will be paid their claims (section 912B, Corporations Act). The meaning of 'retail client' is discussed in section 4.12 below. These arrangements must: • satisfy the requirements in the Corporations Regulations that licensees must obtain professional indemnity (PI) insurance cover that is adequate having regard to the nature of the licensee's business and its potential liability for compensation claims, or • be approved by ASIC as alternative arrangements The PI insurance must be 'adequate' having regard to the nature of the licensee's business and its potential liability for compensation claims. Regulation 7.6.02AAA provides that the following factors must be considered in determining whether the PI insurance is 'adequate': • the licensee's membership of an external disputes resolution scheme (or schemes), 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 • relevant considerations in relation to the financial services business carried on by the licensee, including: - the volume of business - the number and kind of clients - the kind, or kinds, of business - the number of representatives of the licensee. There are a number of other matters which a licensee must take into account in determining whether the cover is adequate, such as: • Amount of cover — ASIC considers that a PI insurance policy must have an aggregate claim limit of at least $2 million for licensees with total revenue of $2 million or less. For licensees with total revenue greater than $2 million, minimum cover should be approximately equal to actual or expected revenue from retail clients, up to a capped minimum of $20 million. • Scope of cover — insurance must cover loss or damage suffered by retail clients due to breaches of obligations under Chapter 7 by the licensee and its representatives. • Terms and exclusions — of special concern are exclusions that mean cover is not available for breaches of obligations under Chapter 7 of the Corporations Act (by a licensee or its representatives) for services (most often advice) that relate to products that are outside the licensee's approved product list. • Financial resources — Licensees must assess what financial resources are required (to cover the excess and gaps in cover due to various exclusions) and ensure such financial resources are available. They should be able to demonstrate to ASIC, if necessary, that such financial resources are available.

Foreign financial services providers

Foreign financial services providers have the following exemptions from the requirement to hold a licence (see reg 7.6.02AG which modifies the operation of section 911A of the Corporations Act by inserting new subsections (2A) to (2E)). These exemptions are summarised as follows: • Financial services are provided by the foreign financial services provider from outside Australia to an Australian citizen or resident in circumstances where the provider does not engage in conduct that is intended to (or likely to) induce persons in Australia to use the service. • Financial services which are related to financial products traded on a licensed market in Australia in which the foreign financial services provider participates (section 795B(2)) are provided by the foreign services provider to a person in circumstances where the person is outside Australia or the provider believes on reasonable grounds that the person is outside Australia. • Financial services are provided by the foreign financial services provider to an Australian financial service licensee or to a person exempt from the need to hold an AFSL under section 911A(2)(h). The licensee or exempt person must act on their own behalf in relation to the provision of the financial services. • Financial services provided by a foreign financial services provider to a person in Australia (either wholesale or retail) where the foreign financial services provider does not actively solicit persons in Australia and the service relates to a financial product: - issued by the provider following an application by, or inquiry from the client - issued by the provider and acquired by the client when the person was outside Australia - that supplements such financial product, or - that is the same kind as, and are substituted for such financial product. • Financial services provided by a financial services provider not in Australia to a professional investor, where the service consists of dealing in, providing advice on, or making a market in derivatives or foreign exchange contracts. In addition, ASIC Class Order (CO) 03/824 exempts a person from the need to hold an AFSL where the person is dealing with wholesale clients and the only reason the person is deemed to be carrying on a financial services business in Australia is as a result of section 911D of the Corporations Act. ASIC has also exempted other foreign financial services providers from the need to hold a licence where they are regulated by certain overseas regulators (see ASIC COs 03/1099 to 03/1103).

Customer identification

Generally, service providers are not allowed to provide a designated service to a customer until the appropriate customer identification procedure has been carried out. The procedure and the minimum information required about a customer varies according to the type of customer (e.g. individual, company, partnership, trust, government entity, association). There are three exceptions to this general rule: • pre-existing customers — the identification requirements do not apply to those who were customers of an organisation before 13 December 2006 • low-risk services — the identification requirements do not apply in relation to services that are designated as low risk • identification after service — the identification procedures can be carried out after the provision of a designated service where the service is specified in the Rules. In certain cases where the identification services have not had to be carried out, the customer's identity will have to be subsequently verified.

Apply your knowledge 3: Retail client George telephones Adam, a stockbroker, and tells him that he wants to buy 1000 NAB shares. George has never purchased or sold shares through Adam or his firm before. He gives Adam a brief description of his personal circumstances, including the fact that he is a lawyer with a $3 million share portfolio. Discuss whether George is a retail or wholesale client.

George will not be a retail client if he has net assets of at least $2.5 million or a gross income of at least $250,000 p.a. for the previous two years. Although George refers to his $3 million share portfolio, it is not clear whether George satisfies these tests (for example, he didn't disclose his salary and he may have margin loans which reduce his net assets to below $2.5 million). Therefore, George may be a retail client.

Exceptions to "retail client" definition

In all other cases, a financial product or service is treated as offered to a retail client unless one of the following exceptions applies: • the value of the product or service exceeds the prescribed threshold of $500,000 (section 761G(7)(a), Corporations Act; Regulations 7.1.18 to 7.1.24) • the financial product or service is provided for use in connection with a business that is not a small business (i.e. a manufacturing business that employs more than 100 people and any other business that employs more than 20 people) (section 761G(7)(b) and 761G(12), Corporations Act) • the financial product or service is not provided for use in connection with a business and the client has a certificate (given in the preceding six months by a qualified accountant) showing net assets in excess of at least $2.5 million or gross income in the last two financial years of $250,000 per year (section 761G(7)(c), Corporations Act; Regulation 7.1.28) • the client is a 'professional investor' (section 761G(7)(d), Corporations Act, referring to the definition in section 9), that is: - a financial services licensee - an APRA-regulated body - a trustee of a superannuation fund, an approved deposit fund , a pooled superannuation trust or a public sector fund with assets of at least $10 million - a person who has or controls at least $10 million in gross assets - a listed entity or related company - an exempt public authority - a company that carries on an investment business and invests funds received through a public offering for the purpose of that investment - a foreign entity that would otherwise fall into any category above. 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.

Retail clients

In keeping with the consumer protection objective of the Corporations Act, there are stricter requirements when a financial service is provided to a retail client, as opposed to a wholesale client. For example, as noted above there are extra obligations in relation to compensation arrangements and dispute resolution systems where financial services are provided to retail clients. Training standards apply when services are to be provided to retail clients. There are also extra disclosure requirements for retail clients (see Topic 6). A retail client is deemed by the law to be less financially sophisticated than a wholesale client. There is a presumption in section 761G that financial services are given to a person as if they were a retail client, unless they are assessed to be a wholesale client. The category of financial product will also play a part in determining whether a person is a retail client, as in most situations clients receiving financial services connected with superannuation products and general insurance products will be deemed to be retail clients. Superannuation In virtually every situation, if a financial product is provided to a client that is a superannuation product or a retirement savings account (or any financial service offered relating to those products), it is deemed to have been offered to a retail client (section 761G(6), Corporations Act). Where a person acquires a superannuation product other than an interest in a self managed superannuation fund (SMSF), the trustee will need to hold a licence with a retail client authorisation. Insurance If a financial product is, or a financial service provided to a person relates to, a general insurance product, the product or service is provided to the person as a retail client if the person is an individual, or the insurance product is or would be for use in connection with a small business (business employing less than 100 people if in manufacturing or less than 20 people in other cases) and the product is: • a motor vehicle insurance product • a home building insurance product • a home contents insurance product • a sickness and accident insurance product • a consumer credit insurance product • a travel insurance product • a personal and domestic property insurance product • medical indemnity insurance product. Refer to section 761G(5), Corporations Act.

Prohibition on holding out

It is an offence under section 911C of the Corporations Act for a person to falsely hold out any of the following: • that the person has an AFSL • that a financial service provided by the person or by someone else is exempt from the requirement to hold an AFSL • that, in providing a financial service, the person acts on behalf of another person, or • that conduct, or proposed conduct, of the person is within authority in relation to a particular financial services licensee. Penalty for non-compliance The maximum penalty for 'holding out' is $9000 ($45,000 for a body corporate) and/or imprisonment for one year.

Acquiring financial products as agent

Item 33 is also of relevance to licensees (and others involved in financial services), and is extracted below: in the capacity of agent of a person, acquiring or disposing of: (a) a security; or (b) a derivative; or (c) a foreign exchange contract; on behalf of the person, where: (d) the acquisition or disposal is in the course of carrying on a business of acquiring or disposing of securities, derivatives or foreign exchange contracts in the capacity of agent; and (e) the service is not specified in the AML/CTF Rules. Regulation, Ethics and Risk Management | FIN102_T5_v5 © Kaplan Higher Education Issuing interests in a scheme Among other things, item 35 is of relevance to issuers of interests in managed investment schemes (treated as 'securities' for the following purposes). Part of this provision is issuing or selling a security or derivative to a person, where: (a) the issue or sale is in the course of carrying on a business of issuing or selling securities or derivatives; and (b) in the case of an issue of a security or derivative — the issue does not consist of the issue by a company of either of the following: (i) a security of the company (other than an interest in a managed investment scheme); or (ii) an option to acquire a security of the company (other than an option to acquire an interest in a managed investment scheme); and...

Making arrangements for a person to receive a designated service

Item 54 of the list of 'designated services' which are covered by the new AML/CTF regime relates to the following designated service: Key concept: Designated service The designated service described in item 54 is directed at capturing the arranging of a designated service by a person who also is at the time acting in the capacity of the holder of an Australian financial services licence (AUSTRAC Public Legal Interpretation No. 2 of 2008) in relation to item 54. AUSTRAC's guidance is that the better interpretation is that item 54 is to apply only where the person who holds an Australian financial services licence (AFSL) arranges a designated service that is also a financial service under the Corporations Act. This means that if the holder of a licence provides advice, in the capacity of the holder of a licence, to a person and then arranges for a person to receive a designated service that is not a financial service, such as a loan, then item 54 should not apply. A financial planner holds an AFSL in order to provide product advice regarding a financial product (as defined in Chapter 7 of the Corporations Act), such as a security (for example a share), debenture or a life policy. As part of the provision of financial product advice, for example, the financial planner arranges for the customer to receive a life policy. The issuing of the life policy that is being 'arranged' for the customer to receive is a designated service under section 6 of the AML/CTF Act and a 'financial product' under the Corporations Act. Example: Item 54 and designated services Where a person or administrator (carrying out administration services on behalf of a superannuation trustee) holds a ASFL and makes an arrangement for another person to receive a designated service described in item 40, 42 or 44 (in table 1 of section 6 of the AML/CTF Act) and making the arrangement is not in the administrator's capacity of an ASFL holder, the administrator's provision of such services does not fall within the AML/CTF Act. Where the administrator makes that arrangement in the capacity of an ASFL holder, the administrators' provision of such services does fall within item 54. Under section 39(7) of the AML/CTF Act, in these circumstances the administrator is not required to carry out the customer identification procedures in Part 2 of the AML/CTF Act. However, the administrator is subject to the suspicious matter reporting obligation under Division 2 of Part 3 of the AML/CTF Act.

Topic learning outcomes

On completing this topic, students should be able to: • summarise the background to, and purpose of, the Australian financial services licence system • identify who must hold an Australian financial services licence and exemptions • explain key financial concepts which apply in holding an AFSL and the role of representatives • explain how to apply for a licence and the reasons why it may be cancelled or suspended • explain in detail a licensee's 'general obligations' under sections 912A and 912B of the Corporations Act • explain the significance of a 'retail client' • analyse the other obligations of a licensee under the Corporations Act.

Limited AFS licences

Regulation 7.1.29A of the Corporations Regulations previously allowed recognised accountants to give advice about self managed superannuation funds (SMSFs) without holding an AFSL. However, under the Future of Financial Advice (FOFA) reforms (which are discussed in 4.13), this exemption was repealed on 1 July 2016. This means that accountants advising clients about SMSFs will need to obtain an AFSL or become an authorised representative of an AFSL holder who has appropriate authorisations to advise on SMSFs. Regulations 7.8.12A and 7.8.14B cover the new limited AFSL. In order to facilitate accountants moving into the AFS licensing regime, the Corporations Regulations have been amended to provide for 'limited' AFSLs. The limited AFSLs allow certain persons to provide one type of financial service, in a limited range, including advising on SMSFs and 'class of product' advice about a range of financial products. The compliance requirements for the limited AFSL scales with the nature of the financial services business. ASIC's Information Sheet 216 'AFS licensing requirements for accountants who provide SMSF services' and Information Sheet 179 'Applying for a limited AFS licence' jointly explain the new regime.

Exemptions from AFSL

Section 911A(2) of the Corporations Act and the Corporations Regulations provide exemptions from the requirement to hold an AFSL. The exemptions include the following conduct: • providing financial services as a representative of a licensee or as a representative of a person exempt from the requirement to hold an AFSL • a product provider who issues, varies or disposes of a financial product under an arrangement with a licensee whereby the licensee, or their authorised representatives, make offers to people to arrange for the product provider to issue, vary or dispose of the financial product • a product issuer who varies or disposes of a financial product at the direct request of the product holder (rather than through an intermediary) • providing general advice by publishing a newspaper or periodical that is generally available to the public (otherwise than only on subscription) and where the sole or principal purpose of the newspaper or periodical is not the provision of financial product advice • providing general advice in transmissions made by means of an information service where the transmissions are generally available to the public and where the sole or principal purpose of the transmissions is not the provision of financial product advice • providing general advice in sound recordings, video recordings or data recordings that are made publicly available and where the sole or principal purpose of the recordings is not the provision of financial product advice • providing the service only to wholesale clients and you are a body regulated by the Australian Prudential Regulation Authority (APRA) and the service is one for which APRA has regulatory or supervisory responsibilities • providing the service only to wholesale clients and you are regulated by an overseas regulatory authority and the provision of the service is covered by an exemption specified by ASIC Note: For information about ASIC's approach to applications under this provision, see RG 176. • providing a financial service that consists only of a 'referral', i.e. informing another person that a licensee (or one of its representatives) is able to provide a particular financial service or class of financial services and giving that other person contact details for the licensee or representative • dealing on one's own behalf in (but do not make a market in) derivatives or foreign exchange contracts for the purpose of managing a financial risk that arises in the ordinary course of a business, but only if they do not deal in derivatives or foreign exchange contracts as a significant part of your business (reg 7.6.01(1)(m)). ASIC may provide exemptions at its discretion through the issue of class orders and granting of individual relief. ASIC will consider giving relief to address atypical or unforeseen circumstances and unintended consequences of the licensing provisions of the Corporations Act. It may give relief on its own initiative or on application. It has the flexibility under the law to give partial or complete relief from the licensing provisions (including with conditions). ASIC provides that when considering using these powers to give relief, it will have regard to its regulatory goals of: (a) promoting consumer confidence in using financial services (including informed decision making) (b) promoting the provision of efficient, honest and fair financial services by all licensees and their representatives (c) supporting confident use of financial markets by consumers and market participants. These goals should be addressed in any application to ASIC. Factors that ASIC may consider include whether: (a) strict compliance with the FSR regime would be impossible or disproportionately burdensome (b) persons to whom financial services are provided would still have the protection intended by Parliament (c) those to whom the relief applies (e.g. the applicant) will receive any benefits (d) a reasonable person would think that the predominant purpose of the product to which the service relates is not a financial product purpose (e) the service is subject to adequate alternative regulation (f) the likelihood and extent of potential consumer detriment resulting from the proposed relief is minimal (g) the service is only provided to wholesale clients.

Maintain organisational competency

Section 912A(1)(e) of the Corporations Act provides that a licensee must 'maintain the competence to provide those financial services'. RG 105 'Licensing: Organisational competence' considers this obligation. In essence, ASIC assesses compliance with this obligation by looking at the knowledge and skills of the people who manage the licensee's financial services business. ASIC refers to these people as 'responsible managers' (formerly referred to as 'responsible officers'). A licensee must nominate its responsible managers when it applies for a licence and then notify ASIC of any changes in responsible managers. As a minimum, ASIC requires a licensee to nominate responsible managers who: • are directly responsible for significant day-to-day decisions about the ongoing provision of financial services • together, have appropriate knowledge and skills for all of the licensee's financial services and products • individually, meet one of the five options for demonstrating appropriate knowledge and skills • are of good fame and character. The number of responsible managers nominated will depend on the nature, scale and complexity of the business. Generally, the minimum number will be two responsible managers and the maximum will be 20. For a large business, a subset of the people who can be responsible managers need only be nominated. For a smaller business, it may be necessary to nominate everyone who can be a responsible manager. For an individual with an AFSL in his or her own name, that person must nominate himself or herself. If a licensee is heavily dependent on the competence of one or two responsible managers (e.g. in a small organisation with one or two principals), ASIC will generally impose a 'key person' condition on the licence. There are five options for demonstrating that a responsible manager has the necessary skills and knowledge to demonstrate competence. Each option has a knowledge component (generally requiring completion of relevant training or qualifications) and a skills component (generally requiring three years of relevant experience). Responsible managers need to meet both components of an option.

Reporting significant breaches of obligations

Section 912D of the Corporations Act requires a licensee to give a written report to ASIC if the licensee: • breaches or is likely to breach specified obligations • the breach or likely breach is 'significant'. What are specified obligations? The specified obligations include most of the obligations discussed above from sections 912A and 912B, such as ensuring financial services are provided efficiently, honestly and fairly, complying with licence conditions, being competent to provide financial services and having a dispute resolution system for retail clients. What is a significant breach? The following factors are taken into account in determining whether a breach or likely breach is 'significant' (section 912D(1)(b), Corporations Act): • the number or frequency of similar previous breaches • the impact of the breach or likely breach on the licensee's ability to provide the financial services covered by the licensee's licence • the extent to which the breach or likely breach indicates that the licensee's arrangements to ensure compliance with the obligations is inadequate • the actual or potential financial loss to clients of the licensee, or the licensee itself, arising from the breach or likely breach Example: Client monies If a person breaches section 1017E by failing to pay client money into an appropriate account for several days after it was required to be paid, the person may owe that client a relatively small amount of interest. This breach, on its own, is not likely to be significant even though it may involve a small financial loss to a client. On the other hand, if such a breach involves more than one client, or a larger amount of money, it is more likely to be significant.

Loan money provided by clients

Similar requirements apply to loan money received from clients by way of loan in connection with the activities authorised by a licensee's licence (section 982B, Corporations Act). In addition, the client must be given a statement setting out the terms and conditions of the loan and the purpose for which the licensee is to use the loan money.

Solicitors, accountants and other professionals

Solicitors in public practice, and qualified accountants in practice, who provide a financial service are subject to the AFSL regime. There is a general exemption in section 766B(5) for solicitors who give advice in a professional capacity about matters of law, legal interpretation or the application of the law to any facts, or any other advice given by a lawyer in the ordinary course of activities as a lawyer that can reasonably be regarded as being a necessary part of those activities. There is also a general exemption that covers advice given by a tax agent registered under the Tax Agent Services Act 2009 (Cth), that is given in the ordinary course of activities as such agent and that is reasonably regarded as a necessary part of those activities. The regulations may set out: • the circumstances in which persons facilitating the provision of a financial service (for example, by publishing information) are taken also to provide that service, or • the circumstances in which persons are taken to provide, or are taken not to provide, a financial service.

Financial product

The general definition of a 'financial product' is a facility through which, or through the acquisition of which, a person does one or more of the following: • makes a financial investment • manages financial risk • makes non-cash payments. There is a long list of specific things in section 764A of the Corporations Act that are financial products, including: • a security (this captures shares or debentures issued by a company) • an interest in a managed investment scheme (this generally captures units in a managed fund) • a derivative • most contracts of insurance • a superannuation interest or a retirement savings account • a deposit-taking facility made available by an ADI • a debenture, stock or bond issued or proposed to be issued by a government • a foreign exchange contract that is not a derivative or a contract to exchange one currency for another that is to be settled immediately. There is also a list of specific things in section 765A of the Corporations Act that are not financial products, such as health insurance and insurance provided by the Commonwealth Government.

Reporting

The AML/CTF Act specifies that reporting entities must inform AUSTRAC of the following: • suspicious matters • the transfer of physical currency or e-money of $10,000 or more • international funds transfer instructions. A report must be made to AUSTRAC where a service provider suspects on reasonable grounds the existence of a suspicious matter. There does not have to have been an actual transaction. It is enough to have a suspicious matter even where a person has just enquired whether the service provider would be willing or able to provide a designated service. Example: Reporting Matters which may give rise to a reporting obligation include: • the person (or the person's agent) is not the person he or she claims to be • may be relevant to the investigation of, or prosecution for, contraventions of laws. AML/CTF programs The general rule is that a reporting entity cannot provide a designated service unless it has adopted and maintained an anti-money laundering and counter-terrorism financing program. The entity must comply with that program. Such a program will consist of two parts — Part A deals with identifying, mitigating and managing AML/CTF risk and Part B deals with the applicable customer identification procedures. There is a special AML/CTF program where the reporting entity is an AFS licensee who arranges for the provision of a designated service (see section 86, AML/CTF Act). Record keeping A reporting entity must keep a record of the following for seven years: • a record of a designated service • customer's document relating to the provision of a designated service • an applicable customer identification procedure • the entity's anti-money laundering and counter-terrorism financing program.

Corporations Act — licensee's general obligations

The Corporations Act imposes a requirement that the holder of an AFSL must comply with the general obligations set out in sections 912A and 912B. It also imposes disclosure obligations that relate to the provision of financial services to retail clients. These are discussed in Topic 6. The obligations are that the licensee must: • do all things necessary to ensure that the financial services covered by the licence are provided efficiently, honestly and fairly • have in place adequate arrangements for the management of conflicts of interest that may arise wholly, or partially, in relation to activities undertaken by the licensee or a representative of the licensee in the provision of financial services as part of the financial services business of the licensee or the representative • comply with the conditions on the licence • comply with financial services laws • take reasonable steps to ensure that its representatives comply with financial services laws • unless the body is a body regulated by APRA, have available adequate resources (including financial, technological and human resources) to provide the financial services covered by the licence and to carry out supervisory arrangements • maintain the competence to provide those financial services • ensure that its representatives are adequately trained and are competent to provide those financial services • if those services are provided to persons as retail clients, have a dispute resolution system complying with the requirements of the financial services regime • unless the body is a body regulated by APRA, have adequate risk management systems • comply with any other obligations that are prescribed by regulations for the purpose of creating such obligations • have arrangements for compensating retail clients for losses or damage suffered through a breach of the obligations imposed by Chapter 7.

Ban on conflicted remuneration

The PJC Inquiry noted with concern the potential for commission-based remuneration arrangements to result in poor or conflicted advice being given. The FOFA reforms therefore introduced a ban on 'conflicted remuneration' which has been incorporated into Division 4 of Part 7.7A of the Corporations Act 2001. Section 963A defines 'conflicted remuneration' 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. RG 246 'Conflicted remuneration', which sets out ASIC's expectations for how AFS licensees and representatives can comply with the conflicted remuneration provisions, and how ASIC will administer these provisions, provides the following examples of benefits that will generally be conflicted remuneration: (a) commissions, whether upfront or trailing, fixed or variable, paid by a product issuer to a licensed dealer group, whether the payment is made directly or through some other arrangement; (b) volume-based payments from a platform operator to a licensed dealer group; (c) volume-based payments from a licensed dealer group to an authorised representative or other representative; (d) volume-based bonuses and other payments, such as a commission or one-off payment, to a financial adviser, which is calculated by reference to the number or value of financial products acquired by clients following the advice of the financial adviser. The payment could be made by: (i) the financial adviser's dealer group; (ii) a platform operator; or (iii) a product issuer; and (e) a discount on the fees paid by an authorised representative to its AFS licensee based on client funds held in a particular financial product': RG 246.48 There is a presumption under section 963L that volume-based payments are conflicted remuneration unless an exception applies. RG 246.82 explains that: A benefit is volume based if access to the benefit or the value of the benefit is wholly or partly dependent on the total number or value of financial products: (a) recommended by an AFS licensee or representative to clients; or (b) acquired by clients to whom an AFS licensee or representative provides financial product advice. Division 4 of Part 7.7A specifically excludes a number of benefits from the definition of 'conflicted remuneration'. The Appendix of RG 246 summarises these exclusions.An AFS licensee must not accept conflicted remuneration: section 963E; and must take reasonable steps to ensure compliance with the prohibition on accepting conflicted remuneration by its representatives: section 963F

Personal information

The Privacy Act 1988 defines 'Personal information' as: ... information or an opinion about an identified individual, or an individual who is reasonably identifiable: (a) whether the information or opinion is true or not; and (b) whether the information or opinion is recorded in a material form or not. The APPs regulate the collection, retention and dissemination of personal information, in accordance with the objectives of the Privacy Act, which are relevantly: • promoting the protection of the privacy of individuals • recognising that the protection of the privacy of individuals is balanced with the interests of entities in carrying out their functions or activities • providing the basis for nationally consistent regulation of privacy and the handling of personal information • promoting responsible and transparent handling of personal information by entities • facilitating an efficient credit reporting system while ensuring that the privacy of individuals is respected • facilitating the free flow of information across national borders while ensuring that the privacy of individuals is respected • providing a means for individuals to complain about an alleged interference with their privacy • implementing Australia's international obligation in relation to privacy. The collection, use or disclosure, storage and destruction of tax file information is also part of the privacy regime. The Privacy (Tax File Number) Rule 2015 specifies how an entity must deal with this specific information. The regulatory authority supervising the Privacy Act is the Office of the Australian Information Commissioner. Complaints may be made to the Office of the Australian Information Commissioner. The Office tries to resolve complaints on a case-by-case basis through conciliation. Depending on the particular complaint, some possible resolutions could include: • taking steps to address the matter, for example providing access to personal information, or amending records • an apology • a change to the respondent's practices or procedures • staff training • compensation for financial or non-financial loss • other non-financial options, for example a complimentary subscription to a service. The Australian Information Commissioner may also seek outcomes which remedy more systemic or serious behaviour, by: • accepting enforceable undertakings • seeking civil penalties for cases of serious or repeated breaches of privacy • conducting assessments of the privacy performance of both Australian government agencies and businesses • developing and registering binding privacy codes that are in the public interest.

Professional Standards of Financial Advisers regime

The Professional Standards of Financial Advisers regime was introduced into law on 15 March 2017, and makes various changes that licensees and representatives alike need to be aware of, and comply with from 2019 onwards as the reforms commence. The regime covers those individuals, or natural persons, who are 'relevant providers'. The section 910A definition of relevant provider captures all licensees, authorised representatives, employees or directors of a licensee, and employees and directors of related companies of a licensee, who are authorised to provide financial advice. The main reforms are: • increasing the minimum level of education required to a bachelor's degree for advisers who are new to the industry from January 2019, with existing advisers to have additional time to comply • a practical year for all advisers entering the profession from January 2019 • creation of a Code of Ethics, and compliance with the code expected of all financial advisers • protection of the terms 'financial adviser' and 'financial planner', by creating an offence for their misuse • creation of a new standards body which will: — approve the various qualifications, including recognition of foreign qualifications — set requirements for work and training — set requirements for continuing professional development — make the Code of Ethics, and set the timeframe for its introduction — specify a word or expression to refer to a provisional relevant provider.

'Provide a custodial or depository service'

The fifth category of a person who is providing a financial service involves 'providing a custodial or depository service'. This occurs where, under an arrangement, a person holds a financial product or a beneficial interest in a financial product in trust for, or on behalf of, another person (the client) or another person nominated by the client. Example: Trustee of a managed investment scheme The trustee of an unregistered managed investment scheme will be providing 'custodial or depository services' if it holds title to scheme assets which are financial products. The trustee may also be providing other licensable financial services.

'Provide financial product advice'

The first category of a person who is providing a financial service is one who is providing financial product advice. 'Financial product advice' is broadly defined in section 766B(1), and means a recommendation or a statement of opinion, or a report including either of them, that is intended, or could be reasonably regarded as being intended, to influence a person in making a decision in relation to a particular financial product, class of products or an interest in such products. It does not include particular advice that is exempted by the Corporations Act (see section 766B) or regulations, including: • anything in an exempt document • advice given by a lawyer in their professional capacity on legal issues • advice given by a tax agent • a quote relating to the cost of a financial product or the rate of return of a financial product. The 'provision' of financial product advice may be by a person who actually prepared the advice, as well as the principal for whom he or she acts and any other person who endorses the advice. Communications that consist only of factual information (i.e. objectively ascertainable information whose truth or accuracy cannot be reasonably questioned) do not generally involve the expression of opinion or recommendation and do not, therefore, constitute financial product advice. However, where factual information is presented in a manner that may reasonably be regarded as suggesting or implying a recommendation to buy, sell or hold a particular financial product or class of financial product, the communication may constitute financial product advice (e.g. where the features of two financial products are described in such a manner as to suggest that one compares more favourably than the other). Example: Financial product advice A client asks a fund representative about salary sacrifice arrangements and superannuation. The representative informs the client what is generally understood by the term 'salary sacrifice arrangement'. This is likely to constitute the provision of factual information. However, if the representative expresses a qualitative or comparative judgment about salary sacrifice arrangements (e.g. 'sacrificing salary into a superannuation fund is very tax effective' or 'sacrificing salary into a superannuation fund is more tax effective than negative gearing'), this would be likely to constitute the provision of financial product advice. Source: ASIC Regulatory Guide RG 36, Table 1.

'Operate a registered scheme'

The fourth category of a person who is providing a financial service is a person who operates a registered managed investment scheme. A person will not be regarded as operating such a scheme merely because: • they are acting as an agent or employee of another person, or • they are taking steps to wind up the scheme. Example: Responsible entity of a real estate investment trust The responsible entity of a real estate investment trust (structured as a registered scheme) will be regarded as providing financial services, including operating the scheme. The responsible entity may also be provided other licensable financial services.

Sub-authorisations

The general rule is that an authorised representative of a financial services licensee cannot, in that capacity, make a person their authorised representative or an authorised representative of the licensee (section 916B, Corporations Act). Any such purported authorisation is void and is a criminal offence (maximum penalty of $18,000 ($90,000 for a body corporate) and/or two years imprisonment). However, an authorised representative of a financial services licensee may, in that capacity, give an individual a written notice authorising that individual to provide a specified financial service or financial services on behalf of the licensee. This can only be done if the licensee consents in writing and this consent is given to the authorised representative. The person so authorised is then also an authorised representative of the licensee. Further sub-authorisation is not permitted. An individual who is authorised in the way described above cannot authorise another person (reg 7.6.08(2), Corporations Regulations). The licensee may give consent in respect of a specified individual or a specified class of individuals (the membership of which might change from time to time). The licensee must keep a copy of the consent for five years after the day on which it ceases to have effect. Failure to do so is a criminal offence punishable by a maximum penalty of $9000 ($45,000 for a body corporate) and/or imprisonment for one year. The authorisation may be revoked at any time by either the licensee or the body corporate that gave the individual the authorisation or, upon request (resignation) by the individual.

Anti-money laundering

The law takes a risk-based, rather than a prescriptive, approach — that is, it is largely for the financial organisation to determine the level of money-laundering or terrorism financing risk that it is exposed to in its provision of certain services (called 'designated services' under the AML/CTF Act) to its customer base. The higher the risk, then the greater the obligations imposed on the financial organisation. AUSTRAC ensures proper compliance with the AML/CTF Act and the AML/CTF Rules by reviewing a financial organisation's annual compliance reports and its auditing powers. The main obligations under the AML/CTF Act are: • customer identification and verification • transaction, suspicious matter and compliance reporting • implementing and maintaining suitable AML/CTF programs • record keeping. Who is covered? The AML/CTF Act regulates according to the nature of the activity rather than the nature of the organisation. It applies to the provision of 'designated services'. An organisation which provides a designated service is called a 'reporting entity'. There are over 60 of these designated services, covering almost the entire financial services sector. The designated services listed include: • opening accounts • accepting deposits • making or guaranteeing a loan (but not 'trade credit') • supplying goods by hire purchase or finance lease (but not where supply is to a consumer) • acquiring or disposing of securities for another party • issuing a life policy or sinking fund policy • carrying on a business of issuing or selling interests in managed investment schemes • superannuation funds (except self managed superannuation funds), pensions and annuities • providing a custodial or depositary service • exchanging currency.

Financial resources requirement

The obligation to have sufficient financial resources is dealt with in RG 166. ASIC sets minimum financial resource requirements to promote appropriate financial risk management, taking into account the nature, scale and complexity of a licensee's business. Rather than ensuring that licensees do not fail, the aim is to ensure that cash shortfalls do not put compliance with the licensee obligations at risk. ASIC's base level financial requirements are that a licensee must: • at all times be solvent — that is, be able to pay all debts as and when they become due and payable • have total assets that exceed total liabilities (as shown in the most recent annual balance sheet lodged with ASIC), and at all times have no reason to suspect that total assets would no longer exceed total liabilities on a current balance sheet • meet ASIC's cash needs requirement by complying at all times with one of the options set out in the RG 166 • meet the audit requirements set out in RG 166.

Financial Services Reform Act 2001

The proposed regulatory framework covers a wide range of financial products including securities, derivatives, general and life insurance, superannuation, deposit accounts and means of payment facilities. The requirements will apply to the activities of existing financial intermediaries such as insurance agents and brokers, securities advisers and dealers, and futures brokers, as well as any other person carrying on a financial services business. The FSR Bill will also put in place a simplified authorisation process for market operators and clearing and settlement facilities. The new regulatory regime provides a flexible and adaptable framework that encourages innovation and competition in markets and clearing and settlement facilities... The three key elements of the regime proposed in the FSR Bill are: • product disclosure; • licensing and conduct of financial service providers; and • licensing of financial markets and clearing and settlement facilities. The principal means of creating this new regulatory and licensing scheme was the inclusion of Chapter 7 'Financial services and markets' in the Corporations Act, which is discussed in detail in this topic.

'Deal in a financial product'

The second category of a person who is providing a financial service is a person who 'deals' in a financial product. Section 766C of the Corporations Act provides that the following conduct (whether engaged in as principal or agent) constitutes 'dealing' in a financial product: • applying for or acquiring a financial product • issuing a financial product • in relation to securities or managed investment schemes — underwriting the securities or interests • varying a financial product • disposing of a financial product. If a person 'arranges' any of those things then that too is dealing unless the conduct amounts to provision of financial product advice or is exempt. Certain conduct is not dealing under section 766C, including where a person: • deals on their own behalf (whether directly or through an agent or other representative), unless the person is an issuer of financial products and the dealing is in relation to their own products • is a government or local government authority, public authority or instrumentality or agency of the Crown and the transaction relates only to securities of that entity, or, if the entity is a government, debentures, stocks or bonds issued or proposed to be issued by that government • is a sub-underwriter and enters into a transaction of an issue of securities that relates only to the sub-underwriting • engages in the conduct in the course of work ordinarily done by clerks or cashiers.

'Make a market for a financial product'

The third category of a person who is providing a financial service is a person who 'makes a market' for a financial product. Section 766D of the Corporations Act provides that a person makes a market for a financial product if: • the person regularly states the prices at which they propose to acquire or dispose of financial products on their own behalf • other persons have a reasonable expectation that they will be able to regularly effect transactions at the stated prices • the person's actions do not constitute operating a financial market. This is in contrast to conduct that involves conducting a financial market. A financial market is defined in section 767A to be a facility through which: (a) offers to acquire or dispose of financial products are regularly made or accepted; or (b) offers or invitations are regularly made to acquire or dispose of financial products that are intended to result or may reasonably be expected to result, directly or indirectly, in: (i) the making of offers to acquire or dispose of financial products; or (ii) the acceptance of such offers. One of the exemptions to operating a financial market under section 767A(2) exists if a person making or accepting offers or invitations does so on their own behalf, or on behalf of one party to the transaction only; namely, making a market. Accordingly, if the person operating the market is not (in effect) a party to the offers or invitations made to acquire or dispose of financial products, then they will likely be operating a market in contravention of section 767A. More information about market operators can be found in RG172.

The three broad compliance obligations

There are three broad compliance obligations in section 912A(1) of the Corporations Act: • do all things necessary to ensure that the financial services covered by the licence are provided efficiently, honestly and fairly • comply with the conditions on the AFSL • comply with financial services laws. These broad compliance obligations are both stand-alone obligations and obligations that encompass the other general obligations. This means that: • if a licensee fails to comply with one or more of the other general obligations, the licensee is also likely to breach the broad compliance obligations • even though the licensee may be complying with all of the other general obligations, it may still be in breach of the broad compliance obligations. This is because the broad compliance obligations are also stand-alone obligations. For example, if a licensee fails to comply with one of the general obligations (e.g. to manage conflicts of interest), then it is unlikely that it is complying with the obligation to provide services 'efficiently, honestly and fairly'.

Acting as a principal or representative?

There is no single test for determining when a financial services provider is acting as a principal rather than as a representative. RG 36 sets out some factors which may indicate that a person is acting as a principal which include: • the person's conduct is not monitored or supervised by someone else • the person holds out that they are a principal • the person's conduct is not covered by someone else's compensation arrangements • if client assets are held in an account in the person's name • if clients are directed to pay fees owing in relation to the provision of financial services into an account in the person's name • if the person receives commissions directly from product issuers, and • if the person has ownership of, access to, or liability for, client information. You may handle money without being treated as a principal where you perform purely administrative or mechanical functions, such as accepting and banking cheques drawn in favour of a licensee or accepting and depositing insurance premiums in an insurance broker's trust account. You will not be holding yourself out to be a principal merely by placing your name on a letterhead, business cards or promotional material provided you ensure that: • the documentation makes it clear that you are acting as a representative of a licensee (and not as a principal) • the licensee for whom you act is clearly disclosed.

Restrictions on the use of certain words

Words related to being a 'broker' It is an offence for a person to use certain words or expressions unless the person's AFSL, or the AFSL under which the person is a representative, provides for the use of those words or expressions. The restricted words or expressions include: 'stockbroker', 'sharebroker', 'futures broker', 'insurance broker', 'insurance broking', 'general insurance broker', and 'life insurance broker', and words that import such words and expressions. Words such as 'independent', impartial' or 'unbiased' It is an offence for a licensee or representative to use words such as 'independent', 'impartial' or 'unbiased' unless: • the person or his or her employer does not receive commissions (apart from commissions that are rebated in full to the client), remuneration calculated on the basis of the volume of business placed by the person with an issuer of the financial product or other gifts • in carrying on a financial services business or providing financial services, the person operates free from restrictions relating to the financial products in respect of which they provide financial advice • the person operates without any conflicts of interest that might: (i) arise from their association or relationships with financial products issuers (ii) reasonably be expected to influence the person in carrying on the business or providing the services. Words related to the terms 'financial adviser' and 'financial planner' In March 2013, the government of the day sought to introduce a restriction on the use of the terms 'financial adviser' and 'financial planner' as part of the FOFA reforms (discussed in 4.13), however these changes were not ultimately passed at that time. However, under amendments to the Corporations Act, made by the Corporations Amendment (Professional Standards of Financial Advisers) Act 2017, these terms will now be protected. As part of the reforms, a person who is not authorised to give financial product advice, either as an AFSL holder or an authorised representative, cannot use either of these terms when providing a financial service or carrying on a financial services business. Misuse of the terms will be an offence from 1 February 2019. It should be noted that there is an applicable exemption when financial advice is given solely to a wholesale client or where the financial advice is provided to an entity by one of its employees or directors. Penalty for non-compliance The maximum penalty for using one of the words or expressions discussed above, or a word or expression with a similar meaning, when not authorised to do so is $2100 ($10500 for a body corporate) for each day, or part of a day, in respect of which the offence is committed.

Licensees cannot authorise other licensees

financial services licensee cannot be the authorised representative of another financial services licensee subject to one exception discussed below (section 916D, Corporations Act). (Any purported authorisation in contravention of this rule is void and is a criminal offence (punishable by a maximum penalty of $18,000 ($90,000 for a body corporate) and/or imprisonment for two years). The one exception to the rule is that a licensee (the authorised licensee) may be the authorised representative of another financial services licensee who is an insurer, if the authorised licensee acts under a binder given by the insurer. For all purposes connected with contracts that are risk insurance products, or with claims against the insurer, in respect of which the authorised licensee acts under the binder: • the authorised licensee is taken to act on behalf of the insurer and not the insured • if the insured in fact relied in good faith on the conduct of the authorised licensee, the authorised licensee is taken to act on behalf of the insurer regardless of the fact that the authorised licensee did not act within the scope of the binder. 'Binder' means an authorisation given to a person by a financial services licensee who is an insurer to do either or both of the following: • enter into contracts that are risk insurance products on behalf of the insurer as insurer, or • deal with and settle, on behalf of the insurer, claims relating to risk insurance products against the insurer as insurer.

Auditor's report

matters set out below, the auditor must, within seven days after becoming aware of the matter, lodge a written report on the matter with ASIC (section 990K(1), Corporations Act). A report must be given in relation to any matter that, in the auditor's opinion: • has adversely affected, is adversely affecting or may adversely affect the ability of the licensee to meet the licensee's obligations as a licensee • constitutes or may constitute a contravention of certain provisions (e.g. dealing with clients' money or property) or a condition of the licensee's licence, or • constitutes an attempt to unduly influence, coerce, manipulate or mislead the auditor in the conduct of the audit. These obligations of an auditor are discussed in section D of RG 34. Failure to comply with these obligations is an offence with a maximum penalty of $10,500 ($52,500 for a body corporate) and/or one year's imprisonment

Dispute resolution system

provided to persons as retail clients, have a dispute resolution system complying with sub-section (2)'. The meaning of 'retail client' is discussed in section 4.12 below. The dispute resolution system must consist of: • an internal dispute resolution procedure that: - complies with ASIC standards and requirements - covers complaints against the licensee made by retail clients in connection with the provision of all financial services covered by the licence • membership of one or more external dispute resolution schemes that: - is or are approved by ASIC - 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. This obligation is considered in detail in RG 165.