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Funds Management - Real Estate & Superannuation

Focus: Financial Services Regulation – September 2007

'Incorporation by reference' regulations now in force

In brief: The Federal Government has finally announced new regulations enabling financial services providers to incorporate by reference some of the information required to be included in retail disclosure documents. Consultant Derek Heath and Senior Associate Justine Woodford discuss the implications of this welcome development and the other measures introduced under these regulations.

How does it affect you?

  • The ability to incorporate information by reference into statements of advice and product disclosure statements (subject to conditions being met) will reduce the length of those documents. This should help reduce costs for financial services providers and benefit consumers by allowing for more meaningful and precise disclosure.
  • Subject to a transitional period, the dollar disclosure requirements relating to general insurance products have now been modified to make them more appropriate for those products by enabling, in applicable circumstances, disclosure of the various costs and benefits of the insurance product to be disclosed by providing a range, percentage or description of the costs and benefits in the product disclosure statement.
  • There are still a number of initiatives that the Federal Government proposed in the draft regulations on which these new regulations are based that are yet to be either implemented or formally rejected by the Government. At this stage, there is no public indication of how the Government will deal with these matters.

Background

In April 2007, AAR reported on the release by the Federal Government of draft Corporations Amendment Regulations (see AAR Focus: Corporate and Financial Services – April 2007) (the draft regulations), which included a number of measures to be introduced as part of the Government's progress towards a simpler regulatory system arising out of the Corporate and Financial Services Regulation Review, which began in April 2006. 

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The new regulations

The Corporations Amendment Regulations 2007 (No 10) (Cth) (the new regulations) commenced on 25 August 2007 and address some important changes proposed in the draft regulations. However, as noted below, there remain some issues included in the draft regulations that are still to be addressed as part of the Federal Government's simpler regulatory system initiatives. Details of the changes that have come into effect under the new regulations are as follows.

Incorporation by reference

Arguably, the most important change has been to allow for 'incorporation by reference' in product disclosure statements (PDSs) and statements of advice (SOAs). This means that financial services providers can incorporate some of the required information by providing a reference to another document or location where that information can be found, instead of including the information in full in the relevant disclosure document. Financial services providers, however, need to consider that information incorporated by reference will be taken to be included in the relevant disclosure document, which means that they will need to ensure that the PDS or SOA complies with the legislative and regulatory requirements and the Australian Securities & Investments Commission's (ASIC) policies applying to those documents (eg that the incorporated information is clear, concise and effective and is not misleading or deceptive etc).1

There are slightly different requirements applying to PDSs and SOAs.

PDSs

A statement or information can be incorporated by reference in a PDS if:

  • it is in writing and is publicly available2 in a document (other than the PDS or a short-form PDS);
  • the PDS:
    • refers to the statement/information;
    • provides sufficient details about the statement/information so that a person can identify the document (or the relevant part of it) that contains the statement/information, locate it and decide whether to read or obtain a copy of it; and
    • states that the person can obtain a copy of the statement/information on request at no charge (and, where that occurs, the copy must be provided as soon as practicable).

Some core information, however, must be included in the PDS (ie cannot be incorporated by reference)3 if particular statements/information have been incorporated by reference in the PDS, including:

  • in relation to the product, a summary of:
    • the purpose and key features; and
    • the key risks;
  • the name and contact details of the product issuer and the seller (if it is a sale statement);
  • the enhanced fee disclosure requirements and the Consumer Advisory Warning in Part 2 of Schedule 10 of the Corporations Regulations (although some parts of the additional explanation of fees and costs in Division 4 are not classified as 'core');
  • information about the dispute resolution system for complaints and how it can be accessed by product holders; and
  • information about any cooling-off regime that applies to acquisitions of the product.

Where statements/information are incorporated by reference in a PDS not required to be lodged with ASIC, the document containing those statements/information must be kept for seven years after the date of the PDS. (If the PDS was required to be lodged with ASIC, the relevant document must also be lodged with ASIC.)

SOAs

A statement or information can be incorporated by reference in an SOA4 in similar circumstances to a PDS.

The person providing the SOA, however, must supply the client with the document (or relevant part of it), unless it has previously been given to the client. Where the providing entity is an authorised representative of an Australian financial services (AFS) licensee, then they don't have to give the document if another authorised representative of the AFS licensee or the licensee has done so.5

There are document retention requirements similar to those outlined above in relation to PDSs – in the case of SOAs, the SOA and the document (or part of it) mentioned in the SOA must be kept for seven years after the day on which the SOA is given to the client.

Dollar disclosure provisions for general insurance products

In recognition of the difficulties that the insurance industry was experiencing in applying the dollar disclosure requirements, the new regulations allow general insurers providing a PDS prepared on, or from, 1 July 2008 for a general insurance product to comply with modified dollar disclosure requirements as follows. If the information needs to be stated in dollars and the amount can only be determined after the responsible person assesses the risk of the insured or after the insured has nominated desired levels of insurance cover, the responsible person may give the insured a document6 containing the information as soon as practicable (but not later than five business days after the general insurance product is issued) and a statement in the PDS that sets out the information by providing it as a range of amounts in dollars, a percentage of a matter mentioned in the statement, or a description.7

There is a transitional period for complying with these new requirements, which ends on 30 June 2008. (The current class order relief continues to be available during the transitional period.8)

Licensing relief for actuaries

Actuaries who, in undertaking the ordinary activities of their business, provide financial product advice to wholesale clients, will not need to hold an AFS licence. This amendment will be welcomed by actuaries who have previously raised concerns that the existing categories of exemption from licensing did not necessarily apply to all aspects of their ordinary business.

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What remains outstanding?

A number of proposals that were included in the draft regulations, and on which the Federal Government sought feedback, have not been included in the new regulations or otherwise dealt with yet.9 We have summarised below the main outstanding proposals as presented in the draft regulations.

  • There would be no requirement to give an SOA or financial services guides (FSG) to a client who rejects a product or financial services advice.
  • Also, in relation to FSGs, they:
    • would not have to be updated where there is a change to information that is not materially adverse, provided there is disclosure on how a client can access the updated information (and that the client can request a copy of the information free of charge); and
    • would be allowed to be standardised in relation to community-owned branches of banking licensees and individuals that are sub-authorised by authorised representatives, subject to some conditions.10
  • Where a superannuation trustee administers more than one fund, the net value of the funds could be aggregated for the purpose of treating the trustee as a wholesale client in relation to financial services advice regarding a superannuation product. The trustee, however, would also have to manage at least one fund of $10 million. Similarly, employers operating businesses other than small businesses could be considered wholesale clients when provided with financial services relating to superannuation products.
  • Bundled general insurance products (that are predominantly wholesale) would be treated as totally wholesale.
  • In applicable circumstances (set out in the draft regulations), 'badging' of a product would not be considered to be providing financial product advice.
  • Secondary service providers could be relieved from their obligations to retail clients in some situations. Intermediaries would be required to accept responsibility for the financial services provided.
  • Oral disclosure requirements applying to FSGs and SOAs would be reduced for products with a cooling-off period.
  • A provider of sickness and accident insurance or a provider of life risk insurance could treat a client as wholesale where cover is part of a package with workers' compensation insurance being provided for the liability of the employer for the benefit of an employee.
  • The jurisdictional reach of the licensing provisions would be modified so that a foreign person could provide financial services to an AFS licensee without the foreign person having to be licensed if the AFS licensee is acting as a trustee or responsible entity and, in that capacity, is a wholesale client in relation to the provision to them of the particular service.

At this stage, the Federal Government has not announced when (or if) it plans to implement these proposals or whether any of them are no longer being pursued.

We will keep you informed of the main developments as they unfold.

Footnotes
  1. While not specifically stated in the regulations or the Explanatory Statement, this is noted in the Draft Corporations Amendment Regulations and Commentary (see page 30) and would appear to be the intended consequence of the 'incorporation by reference' regulations. The Explanatory Statement notes that the effect of both regulations 7.7.09B(5) and 7.9.15DA(3) is that the liability provisions of the Corporations Act 2001 (Cth) apply to the information included by reference in the same manner as they apply to the disclosure documents.
  2. The draft regulations allowed for a PDS to incorporate statements/information by reference to a website (and the Federal Government sought feedback as to whether the proposed regulation should limit the websites from which information could be incorporated to those operated by the particular product issuer). This incorporation option is not specifically included in the new regulations, although the Explanatory Statement indicates that a PDS may refer to electronic resources, such as the Internet (see item 4).
  3. This restriction on incorporation by reference was not specifically included in the draft regulations.
  4. Information required under sections 945B (which requires the financial adviser to provide a warning to a client if the advice is based on incomplete or inaccurate information) and 947D (which requires information regarding the charges and benefits that a client may incur or lose to be provided where a financial adviser recommends the replacement of one product with another) of the Corporations Act cannot be incorporated by reference under the new regulations.
  5. This restriction on incorporation by reference was not specifically included in the draft regulations.
  6.  We assume this refers to the policy schedule (as seems to be indicated in the Explanatory Statement).
  7. The regulation still allows a statement in dollars in the PDS but, given the context of the regulation, this is likely to be difficult. Also, the Explanatory Statement notes that where a general insurer believes they cannot disclose a benefit or cost in dollar amounts in either the PDS or the policy schedule, they will need to apply to ASIC for relief.
  8. Refer to ASIC release IR 07 -11 ASIC extends disclosure relief for general insurance products (dated 21 March 2007) for further details of the current class order relief (under class order CO 05/638, as most recently varied by CO 05/683), applying from 1 April 2007 to 30 June 2008.
  9. The proposal to remove the obligation on public companies to notify ASIC each year of the top 20 shareholders, which was proposed in the draft regulations, was implemented under the Corporations Amendment Regulations 2007 (No 5) (Cth), which came into effect on 1 July 2007. The draft regulations also included a proposal to extend the enhanced fee disclosure obligations (introduced under the Corporations Amendment Regulations 2005 (No 1) (Cth)) to apply to investment life insurance products, with a six-month transition period. The Federal Government sought specific feedback on whether the six-month transition period was appropriate. In ASIC Regulatory Guide 97, Enhanced fee disclosure regulations: Questions and Answers (issued March 2006, reissued June 2006 and May 2007), ASIC recommends (A3, page 5), as a matter of good practice, that providers of investment life policies start complying with the requirements with any necessary adaptation as soon as possible (particularly as the Government had foreshadowed extending the requirements to apply to investment life insurance policies by 1 July 2006).
  10. There was also a proposal to enable an FSG to be combined with a Chapter 6D disclosure document (eg a prospectus). As part of the consultation process for the draft regulations, the Government specifically requested feedback on whether this change was required and appeared to imply it would not pursue this amendment if there was insufficient evidence that entities would actually rely on the exemption.

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