Allens Arthur Robinson

Avoiding repetition of information given to investors

As a result of the FSR refinements regulations, there is no longer any requirement to give a client a SOA in relation to 'further advice' provided to that client if the client has previously been given a SOA containing relevant details of the client's personal circumstances and those circumstances are not significantly different at the time the further advice is given. The consultation paper now poses the following:

• whether the law should be changed so that where information has already been given to a client in a SOA, it does not have to be repeated in a SOA regarding further advice given to that client; and
• if the law were changed, whether any conditions should apply.

The proposed change would be consistent with the current requirements for financial services guides (FSGs).

No requirement to provide a SOA in some situations

Currently, advisers may still be required to provide a SOA even where no financial product is recommended and no remuneration is received in relation to personal advice given to a client. The Australian Securities & Investments Commission (ASIC) has provided general guidance that genuine 'fact-finding' consultations with clients will not, if relevant conditions are met, require a SOA to be provided, although the application of the guidelines is unclear in some cases.

To help clarify the law and also to reduce costs for service providers and lessen the amount of paperwork for consumers, it is proposed that where personal advice is given and no financial product is recommended and no remuneration is received for the advice, a SOA will not need to be prepared.

It is not clear why the second condition (no remuneration) is necessary if no financial product is recommended. Ideally, these conditions would apply as separate exceptions.

Threshold requirements to be met before SOA must be provided

One of the aims of the FSR regime is to ensure that consumers can access professional advice from properly qualified advisers. The consultation paper accepts that the current requirement for advisers to prepare a SOA in situations where the amount of the investment is small may make it difficult for some consumers who are not viewed as commercially viable clients to access professional advice about their investments.

The consultation paper raises the possibility of introducing a (monetary) threshold below which an adviser would not be required to prepare and provide a SOA (although the adviser might be required to keep a document along the lines of a record of advice that is currently required in some situations for further related advice given to a client).

While very unlikely to address the underlying problem, this proposal may help reduce the extent of it.

No need to issue disclosure documents when product/advice is clearly rejected

To stop investors receiving unnecessary documentation and to remove the cost for providers, the consultation paper raises the prospect of changing the current laws so that if a client clearly indicates that it is rejecting a product or advice, a FSG and SOA do not have to be provided to the client for that product or advice.

Third-party custodians and administrators exempt from having to provide SOA

The consultation paper identifies as a source of potential confusion for superannuation members and managed fund investors the receipt of a FSG from a third party (eg a custodian or fund administrator) who provides advice to the fund and with whom the member/investor is unlikely to have had any previous contact.

Accordingly, the consultation paper asks whether third-party custodians and administrators should be exempt from the FSG requirements in such circumstances and, if so, whether any conditions should apply to the exemption.

The refinement proposals have sought to address various situations where FSGs may need to be provided in circumstances where providing them is not helpful. This fragmented approach has made it even more difficult to ensure compliance. A wider review of when FSGs need to be provided would be welcome.

Combining a FSG  with a Chapter 6D disclosure document

Given that the law currently allows a FSG to be combined with a product disclosure statement (PDS), the issue arises as to whether, for reasons of convenience and consistency, the law should be changed to allow a FSG to be combined with a prospectus and the other forms of disclosure documents under Chapter 6D of the Corporations Act 2001 (Cth).

No updating required for non-adverse changes

Again, in order to have consistency between the various requirements for the different disclosure documents, the paper asks whether it is appropriate to change the law so that a FSG will not need to be updated for a change that is not materially adverse, provided there is disclosure on how the updated information can be accessed.

This proposed change is consistent with the class order relief currently provided for PDSs. If the law is changed in this way for FSGs, the PDS relief should also be set out in the legislation rather than in an ASIC class order.

Standardised FSGs for some entities

In the situation identified in the consultation paper, banks with community-owned branches that are established as separate legal entities are currently required to issue separate FSGs. This raises issues such as the need to formally appoint employees of the branches as authorised representatives whose individual details need to be included in the FSG and creates an administrative burden that does not apply to other institutions that have company-owned branches and are, therefore, legally able to produce standardised FSGs.

Accordingly, the consultation paper suggests that, to overcome this situation, it may be appropriate to allow for a standard FSG for community-owned branches of banking licensees and individuals that are sub-authorised by authorised representatives.

This proposal highlights anomalies that can arise under the FSR regime, depending on how a group of entities is legally structured.

Exemption from the requirement to provide FSG

While the Corporations Act exempts an entity from having to provide a FSG for general advice given in a 'public forum', the definition of that term is narrow and does not capture some situations where it might be expected that a FSG should not need to be provided (eg educational seminars directed specifically at groups of employees).

Accordingly, the consultation paper raises the sensible suggestion of extending the definition of 'public forum' to reduce the amount of excessive disclosure that otherwise needs to be made to attendees of educational and other similar seminars, subject to any appropriate conditions.

Incorporation by reference in disclosure documents

'Clear, concise and effective' disclosure is one of the principal objectives of the FSR regime and one of the issues that frequently comes under review. (ASIC has recently formally raised the issue again with the release in February of its draft policy statement, Better prospectus disclosure, in which ASIC provides advice on how it believes prospectuses should be worded and presented to make them shorter, more readable and compliant with the Corporations Act requirements. AAR's Focus: Capital Markets, March 2006 reviewed the guidelines in detail.)

Clearly, one way in which disclosure documents can be made more concise is to allow them to incorporate by reference information that is easily obtainable by investors from other (reliable) sources. As a result of the FSR refinements regulations, the law currently allows for this in some situations. The consultation paper looks at ways to expand the circumstances in which incorporation by reference would be permissible (especially in relation to standardised or general information prepared by industry). The consultation paper includes examples, such as superannuation products, where information about preservation rules is set by legislation and is therefore 'standard' and so may not need to be set out in a SOA or PDS.

'Badging' of disclosure documents

The law currently allows badging (branding) of financial products with information about people other than the product issuer. However, the law also requires proper disclosure so that the way in which a product or disclosure document is badged does not create the impression that the entity whose 'brand' is on the product or document is the issuer or seller of the product.

The consultation paper asks whether there might be scope to amend the legislation to provide specifically that the badging of documents does not of itself constitute the provision of a financial service (ie the badging is not an implied recommendation) and also whether any conditions should apply in this situation.

Small business test

The consultation paper has raised the issue of how best to define the 'small business' test under Chapter 7 of the Corporations Act. Presumably, this is in response to concerns raised by industry that those elements of the retail/wholesale client definition that refer to a 'small business' (and that are currently based on employee numbers) can be difficult to implement and monitor from a practical perspective, with the result that many Australian financial services (AFS) licensees will adopt a conservative approach and treat the business as a retail client. The paper raises for comment a definition based on the value of assets or annual turnover of the business.

If the proposed definition is taken up, the period for which a licensee can rely on the information should also be made clear.

Treatment of superannuation trustees

Under the current law, a trustee of an individual superannuation fund with more than $10 million is treated as a wholesale client. However, a trustee of several small funds that individually have assets of less than $10 million, but if aggregated would exceed the threshold $10 million amount, will, according to the paper, be treated as a retail investor in relation to each individual fund. Accordingly, the consultation paper asks whether it is appropriate to allow for aggregation of funds for the purposes of meeting the asset threshold to enable more trustees to be treated as wholesale investors.

Treatment of employers

Currently, the law requires that all employers are treated as retail clients for the purposes of providing financial services relating to superannuation products. The consultation paper raises the issue of whether large employers (who do not need the benefit of the FSR protections afforded to retail clients) should be able to be classified as wholesale clients. The relevant test proposed is that employers other than those who operate a 'small business' should be treated as wholesale clients where they are receiving financial services in relation to superannuation products.

Sophisticated investors

The consultation paper acknowledges that there are some investors who are 'sophisticated' in terms of their financial knowledge and investment skills, but who do not meet any of the legislative threshold tests and are therefore required under the current law to be treated as retail investors. The issue is, therefore, whether the law should be changed to allow retail investors who wish to be treated as wholesale investors to obtain some form of accreditation (the details of which would need to be worked out in consultation with industry and other experts) that enables them to be treated as wholesale investors when dealing in financial products traded on markets.

It is not clear why this proposal is limited to financial products traded on markets.

Exemptions for AFS licensees acting on behalf of others

Under the FSR refinements regulations, the law was amended to provide an exemption from licensing for foreign financial services providers (FFSPs) where they deal with an AFS licensee acting on its own behalf. This is a narrow exemption and does not take account of where the AFS licensee's business includes acting on behalf of others (eg a trustee of a superannuation fund or the responsible entity of a managed investment scheme). Accordingly, the consultation paper has suggested extending the current law and, if appropriate, imposing any necessary conditions to ensure that those on whose behalf the AFS licensee is acting are adequately protected.

Exemptions for offshore branches

The consultation paper raises another extension of the current laws applying to the jurisdictional reach of the FSR regime. At present, offshore branches of AFS licensees (eg banks) are subject to FSR regulation. The consultation paper asks whether the licensing and disclosure exemptions applying to FFSPs can be extended to offshore branches of AFS licensees.

Dollar disclosure for general insurance

The consultation paper raises the issue of whether it is appropriate that the 'dollar disclosure' requirements apply in the existing form to PDS for general insurance products. These require the disclosure of the costs and benefits of a financial product in dollars unless ASIC determines (in applicable circumstances) that disclosure can take the form of a percentage or description of the amounts instead, together with worked dollar examples, if appropriate. Given the nature of general insurance products and the difficulty in determining exact dollar costs and benefits (as highlighted in the consultation paper), such disclosure requirements can result in lengthy and confusing (and potentially misleading) disclosure. Accordingly, the Government is seeking comments on whether the dollar disclosure requirements should be adapted for general insurance products, one possibility being to allow dollar disclosure to be made through a document other than the PDS (eg a policy schedule).

Sickness and accident insurance

Under the current law, sickness and accident insurance is treated as a financial product. Where it forms part of a workers' compensation arrangement (which generally means that it is provided to an employer for the benefit of an injured employee), it may, depending on the relevant jurisdiction, be treated as a retail product and will, in those cases, be subject to the standard FSR disclosure requirements. In the circumstances, retail financial services disclosure is unnecessary (especially in view of the workers' compensation laws that already apply) and, therefore, the consultation paper queries whether amendments to the FSR legislation are warranted to clarify that a provider of sickness and accident insurance can treat a client as wholesale where cover is for the liability of the employer for the benefit of an employee.

Authorised representatives (insurance agents)

The consultation paper summarises the difficulties (ie liability issues) that can arise for insurers where their agents act for a number of other insurers, particularly in relation to risk insurance. Accordingly, to take account of the way in which insurers generally authorise their representatives to provide financial services in relation to risk insurance products (which, under the current law, may mean that most insurers can effectively find themselves jointly and severally liable for most activities of their authorised representatives), the consultation paper asks whether the law should be changed to refer to 'classes of risk insurance products' rather than 'types of services'. The proposed outcome of this change would be that insurance companies would only be jointly and severally liable with another insurance company for the actions of an insurance agent where that agent provides financial services in relation to the same class of insurance product.

'Bundled' general insurance products

Under the current law, consumers must be treated as retail clients when acquiring a group (bundle) of general insurance products that includes a component of products to which the retail client obligations apply, even if the bundle contains mostly products for which the consumer should be treated as a wholesale client. As noted in the consultation paper, this creates excessive disclosure for consumers and increased obligations (and costs) for insurers and brokers. Accordingly, the paper asks whether it is appropriate to treat bundled general insurance products that are predominantly wholesale as totally wholesale and, if so, what conditions or protections should apply to ensure that genuinely retail clients are not prejudiced.

Exemption from FSR retail client obligations for secondary service providers (SSPs)

As a result of the FSR refinements regulations, SSPs (ie those who provide a financial service to an intermediary who then passes it on to a retail client) no longer need to provide a FSG to retail clients (although this is subject to conditions).

The consultation paper now raises for further consideration whether a SSP might be relieved of all obligations it might otherwise owe to a retail client for the provision of a financial service if the intermediary (who is an AFS licensee or authorised representative) agrees to accept responsibility for the provision of the financial service to the retail client. The consultation paper also raises for consideration the converse situation (ie whether in cases where the SSP accepts responsibility for the provision of a financial service to the retail client, there may be scope to relieve the intermediary from some or all of its obligations to the retail client in respect of that service).

Changes to the scope of general advice

Under the FSR refinements regulations, the scope of 'general advice' was narrowed to make it clear that a financial product issuer can give advice about its own products without it amounting to financial advice. (ASIC has also provided guidance to clarify that the mere possession of information about a client's personal circumstances does not mean that the advice is automatically deemed 'personal advice'.) The consultation paper asks whether more refinements could be made to distinguish further between general and personal advice (and, in particular, to limit further when advice would be regarded as personal) to ensure that the consequential licensing, training and disclosure requirements apply only in appropriate circumstances.

Oral disclosure

Under the FSR refinements regulations, the oral disclosure requirements for financial products with a cooling-off period were amended so that the amount of information required to be communicated orally in 'time-critical' cases was reduced where a PDS is later provided to the client. The consultation paper poses the question of whether the same rules should be applied in relation to FSGs and SOAs for products with a cooling-off period.

Group licensing under FSR

The consultation paper notes that fewer than expected have taken advantage of the group licensing option (which is intended to reduce regulatory burden and overlap for corporate groups and conglomerates). The Government is seeking feedback on why this is the case and, in particular, is interested to know whether they are any factors that have discouraged groups from applying for group licensing and what could be done to make it a more viable choice.

It is surprising that the Government needs to ask this question given the limitations under the current law and that it would have had the opportunity to consult with ASIC. Nevertheless, this is welcome at least as a clear indication that the Government is willing to review the situation.

PS 146 – training requirements

The FSR refinements regulations made some progress on modifying and clarifying the training and competency requirements for authorised representatives and employees of AFS licensees (as set out in ASIC policy statement PS 146). However, the consultation paper recognises that more needs to be done to make the requirements more flexible and asks whether the PS 146 requirements need to be reviewed to recognise the different skills and competencies required for advisers in different business areas.

Easily accessible register of financial service providers who have been penalised by ASIC

While ASIC already publishes details of individuals it has penalised for breaching financial services regulations, this information is not currently recorded in an easily accessible and searchable form (eg a public database). There is an obvious need to ensure that this situation is rectified so that prospective employers can find out easily whether someone has been involved in any past misconduct. Also, consumers may want to find out whether AFS licensees have been penalised by ASIC for breaches of the law. The consultation paper raises the issue of whether and how such a register should be made available.