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Start date for FSR

The bulk of the provisions of the Financial Services Reform Act 2001 (Cth) (FSR Act) will now commence on 11 March 2002. Some parts of the FSR Act have already commenced operation from 27 September 2001 (see below). 

The starting date of the FSR Act was delayed due to amendments made to the FSR Bill arising from the Report of the Parliamentary Joint Statutory Committee (PSJC) which suggested that some of the original provisions of the FSR Bill be amended. (Eds: a summary of the recommendations from the PSJC was reported in ITM No. 5) The FSR Bill received royal assent on 27 September 2001.

As a result of the recommendations made by the PSJC and representations from industry, various amendments were made to the FSR Bill in September before it was passed. These include:

  • a clarification that additional contributions to superannuation products, RSA products (Eds: retirement savings account as defined under the Retirement Savings Accounts Act 1997 (Cth)), life insurance products and deposit products will not constitute an "issue situation" giving rise to the need to provide a Product Disclosure Statement;
  • an exclusion from the definition of financial product (and therefore regulation under the FSR Act) for foreign exchange contracts that are settled immediately;
  • an exemption for lawyers and registered tax agents from the definition of providing "financial product advice" if the advice given is in the ordinary course of carrying out their professional activity as a lawyer or registered tax agent (as the case may be). The effect of this is to exclude these categories of professionals from the need to be licensed under the FSR Act;
  • an extension of the meaning of dealing to cover the conduct of an agent acting on behalf of a person who is dealing in a financial product will also fall within the definition of dealing;
  • the inclusion of a materiality test as to when an updated Financial Services Guide (FSG) is to be given to a retail client. An updated FSG is required if it would be materially adverse to a reasonable person in the position of a retail client if the FSG does not contain that new information; and
  • the power to pass regulation specifying the circumstances in which a right to return a financial product and be repaid can be exercised. The regulation may provide for an increased as well as a reduced amount of money to be repaid. This is relevant to market-linked products that increased in value between the time at which they were acquired and the time the client exercised a right to return the product.  
Operative from 27 September 2001

The most significant changes in effect from 27 September 2001 are:

  • the definition of associate in s9 of Corporations Act 2001 (Cth) (the Act) now has the meaning given to it by ss10-17 of the Act;
  • replacing the definition of continuously quoted securities in the Act with a new definition to include securities of an entity to which no order under ss340 or 341 covered the entity, its director or auditor at any time in the last 12 months;
  • replacing s12 of the Act with a new definition of associate for the purposes of Chapters 6-6C;
  • the Corporations and Securities Panel has been renamed as the Takeovers Panel.

(Source: Minister for Financial Services & Regulation Press Release, No. FSR/068, 30/08/01.

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Get set for the transition to the FSR era

The Financial Services Reform (Consequential Provisions) Act 2001 (the Act) received royal assent on 27 September 2001 and commenced operation on that date. The aim of the Act is to provide a transitional period before certain provisions of the Financial Services Reform Act 2001 (Cth) (FSR) take effect. In particular, under the Act:

  • all current financial service providers will have up to 2 years from the commencement of the FSR to obtain a new licence for their existing activities. The pre-FSR regulatory regime will continue to apply to these providers; 
  • new financial service providers who begin their business after the commencement of the FSR will need to be licensed under the FSR;
  • existing license holders who begin new areas of business after the commencement of the FSR will need to be licensed under the FSR;
  • holders of licences to run authorised stock and futures markets will be issued with an Australian market licence from the date of commencement of the FSR and the conditions of the licence will reflect the financial products in which the holders are entitled to provide services to.   

(Eds: The Act also amends various other Commonwealth Acts such as the Australian Securities and Investments Act 2001 and Superannuation Industry (Supervision) Act 1993 which are not examined here. See also the related article below.)

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FSR related policy statements released

Are you confused about the plethora of policy statements and draft policy statements that have been released by ASIC? 

This table sets out in concise format the 7 FSR related policy statements and draft policy statement that have been released so far. In addition, to these policy statements, a guidance paper on the scope of the licensing regime for financial product advice and dealing has also been released.

Policy Statement No. Subject area Key details
146 Licensing:Training of financial product advisers
  • all natural persons who providefinancial product advice to retail clients have to meet the training standards by completing approved training courses listed on the ASIC Training Register;
  • licensees will have the obligation of ensuring that training standards are met; and
  • licensees are required to develop policies and procedures to ensure that they and their advisers undertake continuing training.
164 Licensing: Organisational capacities
  • licensees will be responsible for ensuring compliance with their licensing obligations including ensuring compliance by their representatives;
  • licensees remain responsible even for functions that have been outsourced; and
  • other measures to ensure compliance such as the level of organisational expertise, the need to have clear written policies and the need to have in place adequate non-financial resources such as appropriate IT systems and human resources.
165 Licensing:Internal and external dispute resolution
  • entities subject to the dispute resolution provisions of the FSR (licensees, unlicensed product issuers and unlicensed secondary sellers) are required to have both an internal and external dispute resolution made available to aggrieved clients;
  • internal dispute resolution procedures must contain the essential elements identified in ASIC's AS 4269-1995 standards;and
  • licensees, unlicensed product issuers and unlicensed secondary sellers are required to be members of approved external dispute resolution schemes.
166 (draft only) Licensing:Financial requirements

For a summary, see next item

167 Licensing: Discretionary powers and transition The factors that ASIC will take into account when exercising its powers to grant modifications or exemptions to the licensing provisions of the FSR Act are whether:
  • strict compliance would be impossible or disproportionately burdensome;
  • persons to whom financial services are provided would still be protected as intended by the legislature; and
  • those whom relief applies will receive any benefits.
168 Disclosure: Product disclosure statements (and other disclosure obligations)
  • ASIC will not vet any product disclosure statements (PDS) prior to its release to consumers;
  • in preparing PDS, product issuers should ensure that the disclosure:
  • is timely;
  • is relevant and complete;
  • will promote product understanding;
  • will promote comparison;
  • will highlight important information; and
  • have regard to the needs of consumers.
169 Disclosure: Discretionary powers and transition
  • ASIC will grant relief form compliance with the hawking prohibition of Div 8, Part 7.8 and 7.9 of the Corporations Act 2001 (Cth) as amended by the FSR Act by considering whether:
    • strict compliance would be impossible or disproportionately burdensome;
    • persons to whom financial services are provided would still be protected as intended by the legislature; and
    • those whom relief applies will receive any benefits.
  • relief from the anti-hawking provisions will not be available to issuers of warrants; and
  • operators of an IDPS must give their retail clients an IDPS guide that meets the requirements of PS 148 in order to get relief from the managed investment scheme provisions. 

(Source: ASIC Media Release, 28/11/01. For more, see the media release)

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Draft policy statement for Australian financial services licence holders

ASIC has released for consultation, its draft policy statement (PS 166) on the financial requirements expected from holders of Australian financial services. Consultations should reached ASIC by 30 November 2001. 

The policy statement does not apply to a body regulated by APRA even if only parts of a body's financial services business is an activity regulated by APRA. The obligations imposed on Australian financial services licensees will be imposed as a licence condition. These are that:

  • all licensee must have in place risk management systems that addresses the risk that the licensees' financial resources will not be adequate to comply with their licence obligations;
  • all licensees (except for participants in a licensed market who can satisfy ASIC that the market's requirements are adequate substitute to the financial requirements) have positive net assets, solvent and sufficient cash resources to cover the next 3 month's expenses;
  • responsible entities of managed investment schemes, operators of investor directed portfolio services and licensees of custodial and depository services must have net tangible assets of a minimum requirement of $50,000 and up to a maximum of $5 million;
  • participants in a licensed market must meet the requirements in the market's operating rules;
  • licensees holding client money or property must have surplus liquid funds of at least $50,000 unless the value of the money or property held is less than $100,000;
  • licensees transacting with clients as principals must have an adjusted surplus liquid funds (with a maximum of $100 million) of at least:
  • $50,000; plus
  • 5% of adjusted liabilities between $1 million to $100 million; plus
  • 0.5% of adjusted liabilities in excess of $100 million.
  • foreign exchange dealers are required to have $10 million of tier one capital (similar meaning to a tier one capital requirement for an ADI) 

(Source: ASIC Media Release, MR01/403, 16/11/01. For more, see the media release) 

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It's raining FSR regulations 

Some of the regulations dealing with certain aspects of the Financial Services Reform Act 2001 (Cth) (FSR) have been promulgated but they have yet to be gazetted. They cover:

  • licensing of financial markets and clearing and settlement facilities;
  • licensing of providers of financial services; 
  • financial product disclosure; and
  • consequential and transitional matters.

Another round of consultation will be undertaken in respect of the following matters:

  • the operation of the exemption given to media companies;
  • the treatment of derivatives, particularly warrants; and
  • whether regulations are needed for the disclosure of labour standard claims and environmental, social or ethical considerations of investments,

before regulations are promulgated for these matters. As a result of the passage of the FSR, amendments were also introduced to both the Australian Securities and Investments Commission Regulations 2001 and the Corporations Regulations 2001. Some of the amendments made to the Corporations Regulation 2001 include:

  • listing those products which do not fall within the definition of a "financial product". These are exempt public sector superannuation schemes, credit facilities, surety bonds and bank drafts;
  • setting out a different product-value tests for certain types of financial products such as derivatives in order to determine whether a client is a retail or wholesale client (Eds: the level of consumer protection is lower for wholesale clients);
  • setting out the obligations to be met by applicants for an Australian market licence and the continuing obligations of licensee;
  • the exclusion of certain entities such as the Stock Exchange of Newcastle Limited, the Bendigo Stock Exchange Limited and their participants in facilitating direct broker-settlement transactions entered into on these exchanges from being a "clearing and settlement facility";
  • setting out the obligations to be met by applicants for an Australian clearing and settlement facility licence and the continuing obligation of licensees;
  • setting out those parties that are exempt from the requirement to hold an Australian financial service licence in providing financial services. These are trustees of, non-public offer superannuation entities and pooled superannuation trusts, persons whose provision of financial services consists solely of referrals to a financial services licensee, parties who arrange for contributions to be paid into a superannuation fund or retirement savings account and persons involved solely in insurance claims handling on behalf of insurers;
  • the manner in which the disclosure of financial information is to be provided to a client and the contents of that disclosure.

(Source: Minister for Financial Services & Regulation Press Release, 10/10/01.) 

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ASIC's guide to FSR transition

To assist in the transition to the new licensing regime under the FSR Act, ASIC has released a guide entitled "Licensing and disclosure: Making the transition to the FSR regime". The guide explains how the transitional provisions under Part 10.2 of the Corporations Act 2001 (Cth) as amended by the Financial Services Reform (Consequential Provisions) Act 2001 (Cth) will apply to:

  • financial services licensing under Parts 7.6-7.8 of the FSR Act; and
  • financial product disclosure under Part 7.9 of the FSR Act.
Financial services licensing

According to ASIC, current financial service providers will have up to 2 years from 11 March 2002 to apply for an Australian financial services licence (AFS). Licensees who are currently:

  • holders of a securities dealers licence;
  • holders of an investment advisers licence;
  • holders of a futures brokers licence;
  • holders of a futures advisers licence;
  • bodies regulated by APRA;
  • registered insurance brokers and life insurance brokers;
  • registered foreign insurance agents; 
  • holders of a general authority under regulation 38A of the Banking (Foreign Exchange) Regulations; and
  • not subject to the licensing regime under the Corporations Act but whose activities will be subject to the requirement to hold an AFS licence such as an operator of an exempt stock and futures markets, persons operating custodial services, providers of non-cash payment facilities, underwriting agencies and representatives of a financial service provider who plan to operate as a principal under the new regulatory regime;

will have to obtain an AFS. Applicants should apply early to prevent the risk of ASIC failing to process the application by the deadline. If current financial service providers engage in new activities, they will have to obtain an AFS licence before engaging in the new activity.

In the case of new financial service providers ie those who do not currently possess a licence as stated above, they will have to obtain an AFS before undertaking the activity. ASIC has indicated that new financial service providers will not be able to avail themselves to the benefit of the transitional provisions and should instead apply under the new regulatory regime. Any application received after 11 January 2002 is unlikely to be processed by ASIC. 

Current financial service providers will still be subject to their old regulatory regime for their existing activities during the 2 year transition period. The new regulatory regime will apply to those new activities carried out by current financial service providers which are not covered by the terms of the licence under the old regulatory regime. In the case of new financial service providers, the new regulatory regime will apply to them. Representatives of financial service providers will continue to be subject to the same regulatory regime as their principal at all times. 

An AFS licence will be granted to current financial service providers as a matter of course (legislative streamlining) unless they fall within those categories of persons that will not be entitled to legislative streamlining. They include:

  • person or body corporate who is or have been insolvent for the last 5 years;
  • if the person has been convicted of fraud for the last 10 years; and
  • if the person has had their authorisation, registration or licence to engage in financial services activities cancelled or revoked by the regulator for the last 5 years.
Product disclosure

The transitional period to the new regulatory regime for existing financial products will end either on 11 March 2004 or when the product issuer chooses to adhere to the new financial product disclosure regime (whichever occurs first). If a person offers a new financial product after 11 March 2002, (ie one that was not offered by the issuer prior to 11 March 2002), they will not be entitled to rely on the transitional period. There are however, certain obligations that will immediately be subject to the new regulatory regime. These are:

  •  information to existing holders of superannuation products;
  • confirming transactions;
  • dealing with money received for financial products before the product is issued;
  • cooling-off period for the return of financial product; and
  • short selling of securities, managed investment products and certain other financial products

During the transition period, existing financial products that are subject to the old disclosure regulatory regime will continue to be subject to that regime. To move to the new product disclosure regime, product issuers will need to lodge a notice with ASIC indicating their intention to opt to the new financial product disclosure requirements. 

(Source: ASIC Media Release, MR01/380, 25/10/01. For more, see the media release)

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Australian market licences - a policy proposal

ASIC recently released its proposed policy on the regulation of financial markets in Australia  for consultation. The new policy is expected to replace the existing policy statements - PS 100 (Stocks markets) and PS 70 (exempt futures markets). Comments on the policy proposal are due on 30 November 2001. 

The policy proposal sets out the key regulatory outcomes that ASIC hopes to achieve in respect of:

  • market information;
  • trading;
  • participants;
  • market supervision;
  • market stability; and
  • clearing and settlement.

The policy proposal also sets out ASIC's approach:

  • to its determination of what constitutes a financial market as set out under s767A of the FSR Act. Broadly, a facility will not constitute a financial market if it is a step in the process that will result in the eventual making or acceptance of offers or invitations (for example, an order routing system that routes offers to another person for execution on another facility); 
  • to its determination of when a financial market is be operating in Australia and thereby necessitating an Australian market licence. Section 791D defines when a financial market is considered to be operating in Australia. The policy proposal flushes out in more detail the approach taken by ASIC in determining when a financial market is deemed to be operating in Australia. Such a market is operating in Australia if:
  • it is operating in Australia ie a significant part of the market infrastructure is located in Australia or participants have secure remote access through proprietary market screens;
  • a person in Australia is able to acquire or dispose of a financial product through that market without intervention from an intermediary; and
  • it is targeted at Australian investors through advertising in Australian publications, direct mail to Australian addresses or email to Australian addresses, where the prices are in Australian dollars and where the market is regularly used by Australian investors.
  • in exempting a market that falls within the definition of a financial market. Its approach is that exemptions should be granted only in rare and exceptional circumstances and only if the market does not require regulation to meet the regulatory outcomes set out in the policy;
  • to the obligations of market licensees and ASIC's annual assessment of each licensees compliance with its obligations; and
  • on how to obtain an Australian market licence. ASIC has indicated that it aims to provide the Minister with advice about the application within 12 weeks of receiving all the required information and documents.     

(Source: ASIC Media Release, MR 01/390, 2/11/01. For more, see the media release)