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CORPORATIONS AMENDMENT REGULATIONS 2005 (NO. 5) (SLI NO 324 OF 2005)
EXPLANATORY STATEMENT
Select Legislative Instrument 2005 No. 324
Issued by the Parliamentary Secretary to the Treasurer
Corporations Act 2001
Corporations Amendment Regulations 2005 (No. 5)
Subsection 1364(1) of the Corporations Act 2001 (the Act) provides that the Governor-General may make regulations prescribing matters required or permitted by the Act to be prescribed by regulations, or necessary or convenient to be prescribed by such regulations for carrying out or giving effect to the Act.
The Financial Services Reform Act 2001 (FSRA) commenced on 11 March 2002. It amended the Act to introduce a uniform licensing, conduct and disclosure regime for all financial service providers. The FSRA allowed two years for existing industry participants to transition to the new financial services regulatory regime.
The purpose of the Regulations is to refine the regulation of the financial services industry, as implemented in the FSRA and associated legislation, to improve the effectiveness of the disclosure regime, to reduce the costs associated with meeting the disclosure requirements and to clarify, where necessary, the operation of various provisions relating to the regulation of financial services.
Financial services regulation requires the disclosure of information orally and through written (or electronic) documents. Such documents include the financial services guide (FSG), the product disclosure statement (PDS) and the statement of advice (SoA). The FSG provides general information about a service provider. The PDS discloses information about a financial product. The SoA provides a written record of personal financial advice and discloses information relevant to such advice.
Since the implementation of the FSRA reforms, industry has experienced some practical problems in meeting the requirements of the regime, especially the disclosure requirements. For example, industry has expressed concerns about the length of the disclosure documents that they are required to produce under the Act. Industry has argued that the requirements of the Act are the direct cause of such lengthy disclosure documents. Further, stakeholders have indicated that such documents have discouraged consumer absorption of disclosed information.
The Regulations include amendments that:
Details of the Regulations are set out in the Attachment.
The Regulations are a legislative instrument for the purposes of the Legislative Instruments Act 2003.
The Regulations commence on the day after they are registered on the Federal Register of Legislative Instruments.
ATTACHMENT
Details of the Corporations Amendment Regulations 2005 (No. 5)
Regulation 1 – Name of Regulations
This regulation provides that the name of the Regulations is the Corporations Amendment Regulations 2005 (No. 5).
Regulation 2 – Commencement
Subregulation 2(1) provides that the Regulations other than those listed in a table to subregulation 2(2) commence on the day after they are registered.
Subregulation 2(2) provides a specific order of commencement for a number of items listed in a table to the subregulation. These items are required to commence in this order because they insert new regulations which are numbered sequentially.
Regulation 3 – Amendment of the Corporations Regulations 2001
This regulation provides that Schedules 1 to 11 of the Regulations amend the Corporations Regulations 2001 (the Principal Regulations).
Schedule 1 – Proposals 1
Item [1] – New regulations 7.7.10AA and 7.7.10AB
The new regulations in item [1] modify the application of sections 941B, 942B and 942C of the Act, relating to Financial Services Guides (FSGs).
The effect of the modifications in regulation 7.7.10AB is that the authorised services referred to in sections 942B and 942C may be the kinds of financial services that the providing entity is authorised to provide (either by its licence or on behalf of an authorising licensee, in the case of an authorised representative) – which is the current legislative requirement, or may be the financial services that the providing entity will be, or is likely to be, providing to the client.
Therefore, the FSG would not need to contain information on all of the financial services or products that the licensee is authorised by its licence to provide or, in the case of an authorised representative, all of the financial services or products it is authorised to provide on behalf of its authorising licensee(s).
However, if they wish, licensees and their authorised representatives will still be able to prepare FSGs which include information on all of the financial services they are authorised to provide.
Some licensees or authorised representatives have ‘multi-channel’ operations. For example, an Australian financial services licence (AFSL) holder may provide services relating to insurance and deposit products through a branch network, and have a separate division providing financial planning services. Although all services are authorised under the one licence, in an operational sense (and from the point of view of a client), the branch network and financial planning division perform separate functions.
To avoid doubt, the reference to financial services ‘that the providing entity will be, or is likely to be, providing to the client’ can be those services likely to be provided by any one or more of the channels of a licensee or authorised representative which has a multi-channel operation. Therefore, each channel can have its own FSG.
It is possible that a client may obtain services from one channel (for example, from the branch network in relation to a deposit product) and then be referred to another channel (say the financial planning division) and obtain further services there.
In terms of the timing requirements for the delivery of FSGs set out in section 941D of the Act, in the situation mentioned above, assuming the branch network and the financial planning division have separate FSGs, the FSG for the financial planning division does not have to be given to the client by the staff in the branch network at the time of referral, but can be given by the staff in the financial planning division when contact is made with the client.
Where an authorised representative provides financial services on behalf of more than one licensee, subregulation 7.7.10AB(2) has the effect that the information required to be included in the FSG about authorising licensees need only refer to the licensee(s) on whose behalf the authorised representative is providing financial services to which the FSG relates. Thus, if the FSG relates solely to services provided on behalf of one licensee, only information about that licensee needs to be included in the FSG.
A consequential modification is made to subsection 941B(2) by regulation 7.7.10AA, to provide that only those authorising licensees on whose behalf the authorised representative provides financial services to which the FSG relates are required to authorise the distribution of the FSG.
Item [2] – New regulation 7.7.02A – Situations when Financial Services Guide is not required
Item [2] applies where a service provider gives the client their FSG, at the same time as passing on a product issuer’s Product Disclosure Statement (PDS). This may occur in any recommendation, issue or sale situation.
If the product issuer’s PDS duplicates information the service provider is required to include in their FSG, item [2] exempts the service provider from the need to supply a complete FSG.
The service provider can instead provide the client with a ‘statement’ that is, in effect, an FSG minus information that is already in the product issuer’s PDS. The service provider will be responsible for ensuring that, between the ‘statement’ and the PDS, the client receives the same information they would have received if given a complete FSG. The form requirements applying to a FSG, to the extent practical, apply to the ‘statement’, for example, the requirement that information be ‘worded and presented in a clear, concise and effective manner’.
Once a service provider has given a consumer the ‘statement’ and PDS, they will generally not be required to give a FSG to that consumer for subsequent financial services they provide. This is because item [2] introduces an exemption from the need to provide a FSG where a consumer had already received a ‘statement’ and a PDS. Of course, if time lapses and the consumer no longer has all of the information that a FSG is required to contain, a new FSG or ‘statement’ and PDS may be required.
Item [2] offers service providers an alternative to combining their FSG with a product provider’s PDS, but does not restrict a service provider from continuing to provide a complete and separate FSG.
Item [2] has a broad application and is available to a number of different service providers, including those that: are the same entity as the product provider; are related to the product provider; are an authorised representative of the product provider or do not have a direct connection to the product provider but, for example, regularly sell or recommend their products.
However, it is important to note that under item [2], the service provider is solely liable for ensuring that a consumer receives the same information through the ‘statement’ and the product provider’s PDS, as they would have received if the service provider had instead given them a FSG. The product provider is not liable for the service provider’s reliance on their PDS.
Item [3] – New regulation 7.7.10AF – Various consequential amendments to Division 7 of Part 7.7 concerning situations where Financial Services Guides do not have to be given
Item [3] ensures that the ‘statement’, referred to under item [2], is subject to the existing liability provisions of the Act.
Item [3] also ensures that, where a client expressly instructs a service provider that they require financial services to be provided immediately (that is, in time critical situations), a providing entity is able to choose to either send that client a FSG or a ‘statement’ and PDS.
Item [3] also ensures that, where a ‘statement’ and PDS are given to a client before the financial service is provided and that ‘statement’ becomes out of date, a service provider has to give the client a new ‘statement’ before providing the service.
Items [4] to [7] – Substitution of subregulations 7.7.04(2), (3) and (4) and 7.7.07(2), (3) and (4), new subregulations 7.7.04(5) and 7.7.07(5) and new regulations 7.7.04A and 7.7.07A
Items [4] and [6] make virtually identical amendments to regulations 7.7.04 and 7.7.07, which set out the information about remuneration (commission) or other benefits (hereafter referred to collectively as remuneration) that must be contained in FSGs given by licensees and authorised representatives respectively.
New subregulations 7.7.04(2) and 7.7.07(2) provide that the information about remuneration that must be disclosed in a FSG provided by a licensee or authorised representative is as set out in subregulations 7.7.04(3)-(5) and 7.7.07(3)-(5) respectively.
New subregulations 7.7.04(3) and 7.7.07(3) provide that, for all FSGs, if the remuneration is able to be ascertained at the time the FSG is given, then the amount of that remuneration should be specified. This applies, for example, if the licensee or authorised representative charges a set fee, regardless of the financial service provided. This essentially restates what is currently contained in paragraphs 7.7.04(2)(a) and 7.7.07(2)(a) of the Corporations Regulations.
Where personal advice will be given
New subregulations 7.7.04(4) and 7.7.07(4) provide that, where the amount of remuneration cannot be ascertained at the time the FSG is given to the client, and the providing entity (that is, the licensee or the authorised representative) reasonably believes that personal advice will be given to the client, the FSG must contain general information about the remuneration, or more detailed particulars of the remuneration. This requirement is set out in paragraphs 7.7.04(4)(c) and 7.7.07(4)(c).
What constitutes ‘general information’ and ‘particulars’ in relation to remuneration disclosure is discussed further below.
In addition, where the remuneration cannot be ascertained at the time the FSG is given to the client, and the providing entity reasonably believes that personal advice will be provided to the client, the FSG has to contain a statement to the effect that the amount of remuneration in relation to specific financial products which are recommended in the personal advice, or the manner in which such remuneration is calculated will be disclosed when, or as soon as practicable after, the personal advice is given. This requirement is set out in paragraphs 7.7.04(4)(d) and 7.7.07(4)(d).
Where personal advice will not be given
Where the remuneration cannot be ascertained at the time the FSG is given to the client and the providing entity reasonably believes that personal advice will not be provided to the client, then the FSG has to either contain particulars of the remuneration (paragraphs 7.7.04(5)(c) and 7.7.07(5)(c)) or general information about the remuneration, along with a statement that the client may request particulars of the remuneration, provided the request is made within a reasonable time after the client is given the FSG and before any financial service identified in the FSG is provided to the client (paragraphs 7.7.04(5)(d) and 7.7.07(5)(d)).
Therefore, the providing entity can either include particulars of the remuneration, or include a general description of the nature of the remuneration, along with a statement that the client may request particulars.
Where the providing entity chooses not to include particulars of the remuneration in the FSG, but rather includes a statement that the client may request particulars, it is acceptable for the providing entity to respond to the request only for a reasonable time after the FSG is given to the client and, in any event, before any service identified in the FSG is provided to the client.
This limitation on the client’s right to request particulars of remuneration is appropriate in order that the providing entity is not required to answer requests for an indefinite period after the FSG is given to the client, which might prove difficult to practically administer, given that remuneration arrangements can change if there is a long period between the FSG being given and the request being made.
What constitutes a ‘reasonable’ time within which a request may be made by the client will depend, to a degree, on the circumstances. By way of guidance, if the FSG relates to only a small number of financial services or products and/or the remuneration arrangements are relatively straightforward, a client should only need a short period (say 7 days from receiving the FSG) to decide whether to seek particulars.
On the other hand, where the client is given a more comprehensive FSG covering a wider range of financial services and products and/or the remuneration arrangements are more complex, the client may require more time to digest the information and decide whether to seek particulars of the remuneration. In such cases a longer period (say 14 days after receiving the FSG) may be reasonable.
General information about remuneration
General information about remuneration has to be more than a mere statement that remuneration has been, or will be, received. The information should include a description of the nature of the remuneration – for example, it should say whether the remuneration is in the nature of commission (and if relevant the type of commission – for example, trailing commission) or some other type of remuneration or benefit, such as volume bonuses for achieving sales targets, and whether those bonuses are in monetary form, or in some other form (such as prizes or gifts).
It is also a requirement that the general information indicates how the remuneration is calculated. For example, in relation to a risk insurance product, commission can be calculated as a percentage of the premium, and this fact should be disclosed. For investment products, commission can be calculated as a percentage of the amount invested. In the case of ongoing remuneration, such as trailing commissions, it should also be indicated how often (for example, quarterly, yearly) and for how long (for example, the term of the investment) they are receivable. However, it is not necessary for general information to provide ranges of amounts or rates of remuneration, or worked examples of remuneration calculations.
Particulars about remuneration
Particulars about remuneration should explain more fully the remuneration arrangements than the general information referred to above and include, to the extent relevant, a statement of the ranges of amounts or rates of remuneration receivable. It is also expected that one or more worked examples will be provided to assist the client to understand the remuneration arrangements and calculations.
Items [5] and [7] insert new regulations 7.7.04A and 7.7.07A which establish the client’s right to request further particulars of the remuneration for licensees and authorised representatives respectively, in situations where the remuneration cannot be ascertained at the time the FSG is given to the client, and the providing entity reasonably believes that personal advice will not be provided to the client. As mentioned above, these particulars must, to the extent relevant, include a statement of the range of amounts or rates of remuneration.
The particulars must also be presented in a manner that is easy for the client to understand. These requirements essentially restate the current requirements of subregulations 7.7.04(3) and (4) and 7.7.07(3) and (4), which are omitted by items [4] and [6].
Schedule 2 – Proposals 2.1
Items [1] to [8] – Amendments of regulations 7.7.05 and 7.7.08, substitution of regulation 7.7.09, new regulations 7.7.10AC, 7.7.10AD, 7.7.10AE, 7.7.10AG, 7.7.10B, 7.7.10C, 7.7.10D and 7.7.10E, saving of regulation 7.7.10 and omission of Division 51 of Part 10.2
Item [4] inserts a number of new regulations. Regulation 7.7.10AE substitutes a new section 946B of the Act. Essentially, the new regulation broadens subsections 946B(1) and (2) of the Act (which currently apply to further market‑related advice), by removing a number of the existing requirements in those subsections. Existing subsections 946B(3) and (3A) are also modified by the new regulation. However, existing subsections 946B(5) and (6) are unchanged.
The effect of the modifications to section 946B is that exemptions from the need to provide a Statement of Advice (SoA) apply not in respect of further market-related advice, but in respect of further advice. The significance of the change is that the exemption potentially applies to any provider of personal advice, and in respect of advice in relation to any financial product. That is, it is not limited, as at present, to providers of personal advice who are participants on a licensed market and to products able to be traded on licensed markets.
In addition, other current criteria of section 946B are removed. In particular, there are no limitations on the means by which the further advice is provided (currently the exemption is limited to advice provided by telephone and certain electronic means of communication), nor is it a precondition that the advice provider reasonably believes that the client requires the further advice promptly.
The existing requirements of section 946B that continue to apply are that the client has previously been given a SoA, which sets out the client’s relevant personal circumstances (paragraph 946B(2)(a)), and that those circumstances are not significantly different at the time further advice is provided from the circumstances that existed at the time the advice in the previous SoA was given (paragraph 946B(2)(b)).
To the extent that the further advice is based on matters other than the client’s relevant personal circumstances, that basis must also not have changed significantly between the giving of the previous advice and the further advice (paragraph 946B(2)(c)).
Therefore, if there is a significant difference in either the relevant personal circumstances of the client or the basis of the further advice (to the extent the advice is based on other matters) then the section cannot be relied upon, and a SoA for the further advice is required.
It is no longer a requirement that the adviser has, either immediately before the further advice is given, or within the preceding 12 months, checked whether the client’s objectives, financial situation or needs have changed (as is currently required by subparagraph 946B(1)(d)(ia)). However, advisers are still subject to the overarching obligation imposed by section 945A requiring them to have a reasonable basis for any personal advice given, which carries with it an obligation to determine the relevant personal circumstances of the client before giving advice.
Subsection 946B(2A) is a transitional provision, replacing existing regulation 10.2.214, which is repealed by item [8]. The subsection essentially provides that certain earlier advice given to a client is accepted as a substitute for the provision of a previous SoA, such that a new SoA is not required for further advice, provided that the other requirements of subsection 946B(2A) are met. These other requirements mirror the requirements of subsection 946B(2).
Where the requirements of subsections 946B(2) or (2A) are met, the adviser does not have to give the client a SoA for the further advice, but is instead required to make more limited disclosure at the time, or as soon as practicable after, the further advice is given (subsection 946B(3)) and is required to keep a record of the advice (RoA) which must be made available to the client on request (subsection 946B(3A) and paragraphs 942B(2)(g) and 942C(2)(h), which are modified by regulations 7.7.10AC and 7.7.10AD in item [4]).
Under subsection 946B(3), the client has to be given a statement containing information that would, if a SoA were to be given, be required to be in the SoA by paragraphs 947B(2)(d) and (e), or 947C(2)(e) and (f), as the case requires, and by section 947D, if applicable.
The provisions referred to in subsection 946B(3) relate to information about remuneration and associations which may influence the further advice and, where applicable, information about the consequences of switching products. The disclosure required by subsection 946B(3) could be made in any form (for example, in writing or verbally, or a combination of the two). In this regard, section 9 of the Act defines the word ‘statement’, for the purposes of Chapter 7 of the Act, to include matter that is not written, but conveys a message.
The content requirements for the RoA required under subsection 946B(3A) are similar to those that currently apply in respect of the record of further market-related advice, and are set out in a substituted regulation 7.7.09 (see item [3]).
The RoA has to set out the advice given to the client (subparagraph 7.7.09(1)(a)(i)), or brief particulars of the recommendations made to the client, including the basis on which the recommendations were made (subparagraph 7.7.09(1)(b)(i)).
Where information is required under subsection 947D(2) (broadly speaking, information about the consequences of partially or wholly replacing one financial product with another), the RoA has to contain either the information in full (subparagraph 7.7.09(1)(a)(ii)), or brief particulars of that information (subparagraph 7.7.09(1)(b)(ii)).
Where a statement is required by subsection 947D(3), the RoA either has to contain that statement – which essentially informs the client that there will or may be consequences of replacing one financial product with another, but the advice provider does not know what they are (subparagraph 7.7.09(1)(a)(ii)) – or an acknowledgement that the statement has been given to the client (subparagraph 7.7.09(1)(b)(iii)).
The legislation does not define when a client’s relevant personal circumstances or the basis for the advice (so far as it relates to other matters) will be considered to be ‘significantly different’ such that subsections 946B(2) or (2A) will not apply. Given that personal advice contained in a SoA is particular to an individual client, what constitutes a significant change in circumstances may vary from one client to another.
By way of example, a change in annual income of $20,000 may represent a significant change in the financial situation of a person with an annual income of $50,000, but may not be a significant change for a person with an annual income of $200,000.
It is therefore up to advisers to determine whether or not their clients’ relevant personal circumstances (or the basis of the advice, so far as it relates to other matters) are significantly different at the time the further advice is given, compared to the time at which the advice contained in the previous SoA, or the earlier advice to which subsection 946B(2A) applies, was given.
Application of substituted subsections 946B(1) to (3A) – examples
It is envisaged that the provisions contained in subsections 946B(1) to (3A) will be able to be relied upon only where the further advice relates to a class of financial product that was discussed in the previous SoA referred to in subsection 946B(2), or in the earlier advice to which subsection 946B(2A) applies, as the case may be.
By way of example, the provisions will apply where the previous SoA (or the earlier advice) contained advice in relation to listed securities, and the further advice also relates to listed securities – provided the client’s relevant personal circumstances, or to the extent that the advice is based on other matters, those matters, have not changed significantly.
Similarly, the provisions are applicable where the further advice recommends a client make additional contributions to an existing investment product (including a superannuation fund) where the previous SoA or earlier advice related to that product.
On the other hand, if a client seeks advice on switching to a new superannuation fund and they have not been provided specific advice, in a previous SoA or in earlier advice, on choosing an appropriate superannuation product – in contrast to broad advice on the benefits of investing in superannuation – then a new SoA addressing the switching of the client’s superannuation fund has to be given.
The provisions are also not applicable where the further advice relates, for example, to a superannuation product, where the previous SoA or earlier advice relates to some non-superannuation investment product.
By way of guidance, the following (as they are defined in Chapter 7 of the Act) are considered to be distinct classes of financial product:
The structuring of SoAs in terms which cover a wide range of product classes going beyond the client’s relevant personal circumstances at the time of its preparation, in order to avoid the need to prepare further SoAs for subsequent advice, do not fall within the parameters of the revised provisions in subsections 946B(1) to (3A). Providers of personal advice have an overarching obligation to ensure that personal advice is suitable for the client (see section 945A of the Act).
Items [1] and [2] of the Schedule, and those parts of item [4] other than the substituted section 946B (that is, regulations 7.7.10AC and AD), make consequential amendments reflecting the change in terminology in section 946B from ‘further market-related advice’ to ‘further advice’, and the change in the period within which the RoA must be retained from 90 days to 7 years.
Item [5] is a provision which saves the operation of existing regulation 7.7.10. This is required because the provision under which that regulation was made (paragraph 946B(5)(c)) is being substituted by regulation 7.7.10AE.
Item [6] (regulation 7.7.10AG) applies the liability provisions in Division 7 of Part 7.7 of the Act relating to disclosure documents to the RoA required under subsection 946B(3A).
Item [7] contains regulations which omit the current definition of further market related advice in section 761A of the Act and replace it with a definition of further advice (regulations 7.7.10B and 7.7.10C).
Item [7] also contains regulations 7.7.10D and 7.7.10E, which apply section 947D (which requires the provision of certain information to a client where advice recommends the replacement of one financial product with another) in respect of further advice referred to in section 946B.
Therefore, if further advice is advice of a kind referred to in section 947D, then the RoA needs to include the information required by that section, in the format prescribed by regulation 7.7.09 outlined above. Also, the disclosure required under subsection 946B(3) has to include information required by section 947D, if applicable.
Overview
A Product Disclosure Statement (PDS) is a document that is intended to contain the information on a financial product that a person would reasonably require to make a decision on whether to acquire the product. Chapter 7 of the Act contains provisions that require a PDS to be given to retail clients in certain situations. Proposal 3 of the Refinements to Financial Services Regulation Proposals Paper (the Proposals Paper) recommends that the regulations be amended to allow providers of financial products to substitute a Short‑Form PDS, with full product information available on request or through an easily accessible forum, such as the internet.
Summary of Short-Form Product Disclosure Statement requirements
PDSs have as a rule turned out to be complex and lengthy documents. Consumer feedback suggests that the average retail investor finds it difficult to absorb the large volume of information in some PDSs, and is therefore deterred from using the information to make investment decisions. The aim of this measure is to give product providers the option of creating a Short‑Form PDS that contains a summary of defined core information relating to the product. The term ‘summary’ in this context is intended to mean a condensed and straightforward account of certain key content items that are required (among others) to be included in the PDS.
The information contained in the Short‑Form PDS is expected to be sufficient to give retail clients a reasonable understanding of the key features of the product, including what costs they will incur in acquiring the product. The regulations also permit other information to be included in the Short‑Form PDS if it was of particular relevance to the product. A further method to abbreviate the contents of a Short‑Form PDS is incorporation by reference, whereby reference can be made to information contained in the PDS or FSG, and such information is then taken to be incorporated in the Short‑Form PDS by virtue of this reference. Sufficient detail, however, has to be provided to allow any retail client who wished to do so to look up the full information in the PDS or the FSG. The overall intention is to give financial product providers the flexibility to create a document that is not only shorter, but also more tailored to the individual product, and that is written in a manner that is more appealing and informative for the retail client.
Importantly, the Short‑Form PDS does not completely replace the PDS, but is an optional disclosure document. Providers of financial products will still be required to prepare a PDS (either in hard-copy or electronic form as allowed under section 1015C of the Act) and make it available where a retail client requests one. Unless the PDS is specifically requested, however, they can satisfy their obligation to provide a PDS to a retail client by instead giving the client a Short‑Form PDS.
The main difference between a Short‑Form PDS and a PDS lies in their content. Generally, all provisions that apply to a PDS are mirrored in their application to the Short‑Form PDS. Exceptions to this general approach occur where the extension of a particular section or subsection to a Short‑Form PDS provides an inappropriate outcome or where it is not necessary.
Drafting approach
The method of introducing the Short‑Form PDS measure into the Act is by way of regulations that modify the operation of Parts 7.7, 7.8 and 7.9 of the Act. Drafting of the regulations seeks to rely as much as possible on the existing PDS infrastructure in the Act and regulations. To achieve this, a high-level deeming method is used, to the extent possible, to ensure that relevant PDS sections and regulations apply to a Short‑Form PDS as if a reference to a PDS in those sections and regulations included a reference to a Short-Form PDS.
It is, however, important to note that use of this high-level method is not possible in all circumstances, and that a variety of methods have to be applied to ensure that other PDS provisions extend in their application to a Short-Form PDS. For example, in relation to enforcement and offence provisions, specific amendments have been drafted to unambiguously extend their application to the Short-Form PDS in an appropriate manner. Other methods (including amending definitions) are used elsewhere to achieve the desired outcomes. In addition, certain provisions that do refer or apply to a PDS do not need to be extended to a Short‑Form PDS because they would continue to apply appropriately, irrespective of whether a financial product provider had prepared a Short‑Form PDS or not.
Item [1] – Substitution of regulation 7.9.02A – Alternative ways of giving Statement
The substituted regulation ensures that the existing regulation 7.9.02A, which provides for alternative ways of giving a PDS or a Supplementary PDS to a person, also applies to a Short‑Form PDS and a Supplementary Short‑Form PDS.
Item [2] – New Division 5AB – Short-Form Product Disclosure Statements
Regulation 7.9.61AA amends section 761A of the Act, with effect in Parts 7.7, 7.8 and 7.9, by inserting new definitions for Short‑Form PDS and Supplementary Short‑Form PDS.
Further modifications to Parts 7.7, 7.8 and 7.9 are included in proposed new Schedule 10BA, which follows immediately.
Item [3] – New Schedule 10BA – Modifications of the Act relating to Short‑Form Product Disclosure Statements
Clause [1.1] – Modification of paragraph 949A(2)(c)
Clause 1.1 modifies paragraph 949A(2)(c) by allowing a financial services provider giving general advice to a retail client to refer to a Short-Form PDS instead of a PDS when warning the client in the manner required.
Clause [2.1] – Modifications of paragraphs 992A(3)(c), (d) and (e)
Clause 2.1 modifies paragraphs 992A(3)(c), (d) and (e) with the effect of prohibiting hawking of financial products unless a PDS or a Short‑Form PDS was given or read out and the person was informed of the importance of the information in the PDS or the Short‑Form PDS.
Clause [3.1] – New Division 3A – Short‑Form Product Disclosure Statements
Clause 3.1 introduces new Divisions 3A and 3B into Part 7.9 of the Act.
New section 1017H – Short‑Form PDS
This section ensures that whenever the legislation requires a financial product provider to give a PDS for a financial product to another person, they may instead provide a Short‑Form PDS. The regulation also requires that if a person instead requests a PDS, the product provider must give the PDS.
Therefore, in all situations where a financial product provider is required to give a PDS for a financial product, they have the option of instead giving a Short‑Form PDS.
However, this regulation does not affect the requirement to prepare a PDS. Irrespective of whether a Short‑Form PDS is prepared, the existing obligation to prepare a PDS at a certain time and in a certain form continues to apply.
In order to ensure the appropriate application of section 1011B, the responsible person for a Short‑Form PDS is defined as the same person who is responsible for the PDS for the product.
In addition, this regulation does not apply to general insurance products. These products are the subject of separate arrangements in Schedule 5 of the Regulations.
New section 1017I – Contents of a Short‑Form PDS
Contents
Subsection 1017I(1) prescribes that a Short‑Form PDS for a financial product has to contain a summary of such statements and information included in a PDS for the product as required by paragraphs 1013D(1)(a), (b), (c), (d), (e), (g) and (i) of the Act. These paragraphs relate to information about the issuer of the product, significant risks and benefits, costs and commissions, dispute resolution mechanisms and cooling-off periods. Because the provision requires a summary of the relevant PDS content it indirectly transfers the effect of a number of provisions from the PDS to the Short-Form PDS. Paragraph 1013D(1)(m), for instance, which requires the statement of certain amounts in dollars, is made applicable to the Short‑Form PDS by virtue of the requirement to summarise the PDS.
The Short‑Form PDS is also required to include a statement that notifies the retail client of their right to ask for the PDS for the product and the means by which the client can ask for the PDS.
Extra information for certain products
Subsection 1017I(2) requires that for superannuation and managed investment products a summary of information about fees and costs (for example, as required by paragraphs 1013D(1)(d) and 1013D(1)(e)) is not sufficient.
Instead, the Short‑Form PDS for such products has to include, in full, the additional information on fees and costs required by regulations 7.9.16L and 7.9.16N (also known as the enhanced fee disclosure requirements).
Other information may also be included
Subsection 1017I(3) provides that the Short‑Form PDS may also include other information to that specified above and may also refer to other information that is set out in the PDS or an FSG relevant for the product. This procedure is known as ‘incorporation by reference’, and can be used to eliminate the need to reproduce in full technical or ancillary information not directly relevant to the investor’s needs.
Reference to identify incorporated information
Subsection 1017I(4) states that where other information is referred to in the Short‑Form PDS, the reference has to identify the document (that is, the relevant PDS or FSG) or the part of the document that contains the information. This will assist any investor who wanted to look up the detailed information referred to in the Short-Form PDS.
Incorporated document forms part of Short-Form PDS
Subsection 1017I(5) provides that the document or part referred to in subsection 1017I(4) is taken to be included in the Short‑Form PDS. This is relevant for enforcement and liability purposes so that where a retail client has received a Short‑Form PDS, they are taken to have read the information incorporated by reference. If no such explicit reference is provided the information is not taken to have been incorporated.
Rule as to statements in Short-Form PDS
Subsection 1017I(6) provides that if a PDS for a financial product may include a statement made by a person (see section 1013K), it is also permissible for that statement to be included in the Short‑Form PDS for the product.
This modification ensures that section 1013K applies appropriately to a Short‑Form PDS. Therefore, where consent has been obtained for inclusion of a statement in a PDS (consistent with the requirement in section 1013K), no further consent is required to include the statement (or a summary of the statement) in a Short‑Form PDS.
New section 1017J – Title of Short-Form Product Disclosure Statement
This section prescribes the exact form of the title to be used for the Short-Form PDS and requires it to be located on the cover or at the front of the document.
New section 1017K – References in sections to Product Disclosure Statement to include references to Short‑Form PDS
This section extends the application of a number of other provisions of the Act to the Short-Form PDS. This is achieved by stating that each provision mentioned applies to a Short‑Form PDS as if a reference to a PDS in the provision included a reference to a Short‑Form PDS.
The provisions of the Act that are modified under section 1017K cover a variety of matters, including the possibility of combining the Short‑Form PDS with other documents such as the FSG, the point in time when a Short‑Form PDS must be provided, further detail on the form and content of a Short‑Form PDS, and others.
Section 1017K also extends to any regulations made under the affected sections or subsections and to any regulations that modify those sections or subsections. This effectively ensures that the requirements and obligations that apply to a PDS as contained in these sections and subsections (whether under the Act or the Principal Regulations) extend to a Short‑Form PDS unless otherwise specified.
New Division 3B – Supplementary Short-Form Product Disclosure Statements
This new division contains a number of sections that mirror the existing sections 1014A-F in the Act. These existing sections provide for certain matters relating to a Supplementary PDS, which is used to correct or update an existing PDS.
The effect is to extend the operation of the existing provisions to a Supplementary Short‑Form PDS. The matters covered include the definition of what a Supplementary Short‑Form PDS is, its title and form, and the effect of giving it to a person.
Section 1017P stipulates that where a person has received a Short‑Form PDS, they have to be given a Supplementary Short‑Form PDS if the need for supplying a supplementary document arises, and not a Supplementary PDS.
Section 1017Q extends the effect of a number of various other sections and subsections to any Supplementary Short‑Form PDS, including matters such as who would have to prepare the document, the manner of presenting the information included, a requirement to date the document, and others.
Clauses [3.2] and [3.3] – Modification of section 1015A and subsection 1015B(1)
The new arrangements with respect to ‘Subdivision E – Other requirements relating to Product Disclosure Statements and Supplementary Product Disclosure Statements’ in Part 7.9, Division 2 of the Act, are as follows.
Section 1015B continues to operate as before. This means that no Short‑Form or Supplementary Short‑Form PDSs will need to be lodged with ASIC.
Sections 1015C, 1015D and 1015E apply to all PDSs, Supplementary PDSs, Short‑Form PDSs and Supplementary Short‑Form PDSs. These sections deal with the manner in which these documents may be given to retail clients, the requirement to lodge an in-use notice with ASIC and how and when an altered document may be given to a client.
Clauses [3.4] to [3.7] – Modification of section 1018A
These clauses have the effect that the existing section 1018A is extended to cover a Short‑Form PDS. This section regulates the advertising of financial products, and mainly requires that any advertising material must make reference to the PDS for the product, except in certain defined situations.
Clause [3.8] – Modification of paragraph 1020D(b)
This clause modifies the operation of paragraph 1020D(b) so that it also extends to a Short‑Form PDS and a Supplementary Short‑Form PDS. The section provides that a contract with a client cannot stipulate that the client is taken to have notice of anything not specifically referred to in a PDS or Supplementary PDS.
Clauses [3.9] to [3.26] – Modification of sections 1021B, 1021C, 1021H, 1021J, 1021K, 1021L and 1021M
These clauses have the effect that each of the above sections applies to a Short‑Form PDS and a Supplementary Short‑Form PDS. The sections listed deal with offences in relation to a PDS and a Supplementary PDS, including situations where such a document is not given as required, a person becomes aware that a document is defective, a person makes unauthorised alterations to a document, and others.
In the case of section 1021C, a new subsection 1021C(6) is inserted stating that a person who does not give a PDS because a Short‑Form PDS has been given is not taken to have contravened section 1021C and therefore has not committed an offence.
Clauses [3.27] to [3.32] – Modification of sections 1022A and 1022B
These clauses extend the effects of sections 1022A and 1022B to a Short‑Form PDS and a Supplementary Short‑Form PDS. These sections set out in which situations civil liability in relation to a PDS or Supplementary PDS may arise, what losses or damages may be recovered in these situations, from whom such losses or damages may be recovered, and other relevant matters.
Schedule 4 – Proposals 4 and 6
Items [1] and [2] – New regulations 7.9.15H and 7.9.15I and omission of regulation 7.9.80 – Product Disclosure Statement may sometimes be provided later
Regulation 7.9.15H replaces section 1012G with a new section. Section 1012G currently provides for situations where a Product Disclosure Statement (PDS) may be provided later than at or before the time that the product is issued or recommended, when it would otherwise be required to be given to a client. Section 1012G currently applies to products with a cooling-off period, as well as a financial product that is:
However, the regulations remove the requirement for a PDS to be provided for basic deposit products, non-cash payment facilities related to a basic deposit product and travellers’ cheques. As such, section 1012G no longer applies to these financial products.
For a financial product with a cooling‑off period, regulation 7.9.15H reduces the oral disclosure requirements, given that a written PDS is required to be provided within a relatively short time after the issue or recommendation is made.
The oral disclosure requirements currently listed in paragraph 1012G(3)(a) are reduced to:
In addition to the oral disclosure items listed in the refinement proposal, a further requirement is added. The regulated person is also required to ask the client if they would like further information about the product and provide that information to the client, if requested. This is not an onerous requirement and provides appropriate consumer protection to enable a client to receive more information, if they wish, prior to a PDS being provided.
It is anticipated that this reduction in the oral disclosure requirements will minimise frustration for consumers who do not wish to receive voluminous amounts of information from product providers. However, consumers who require additional information are able to ask for further information at the time of issue or recommendation of a financial product. As there is a cooling‑off period, consumers are able to read further information about the product in the PDS that they subsequently receive and are still able to return the product if they choose.
New regulation 7.9.15I – Modification of section 1012IA
As a result of the re-ordering of the oral disclosure requirements in subsection 1012G(3), a reference to this subsection in section 1012IA is amended. Draft regulation 7.9.15I amends the reference in subparagraph 1012IA(4)(b)(ii) from subparagraphs 1012G(3)(b)(i) and 1012G(3)(b)(ii) to subparagraphs 1012G(3)(c)(i) and 1012G(3)(c)(ii) respectively.
The amendments do not change the disclosure requirements of the anti‑hawking provisions in section 992A. These provisions require a person who has received an unsolicited phone call or other unsolicited contact relating to a financial product to be given the option to have any of the information required to be in a PDS read out to them. Given the important consumer protections contained in these anti‑hawking provisions, it is not intended to change their application.
Item [3] – Omission of regulations 7.9.80C and 7.9.80D
In December 2003, the oral disclosure requirements were streamlined to reduce the amount of information provided where a PDS was later supplied. The requirements in section 1012G were amended by regulations 7.9.80C and 7.9.80D, which exempt providers of certain financial products from the requirement to orally communicate information about the essential features of the product and information about the significant risks and dispute resolution system that is required to be included in a PDS by paragraphs 1013D(1)(c) and 1013D(1)(g) (and paragraphs 1013D(1)(d) and 1013D(1)(i) for a recommendation situation. This exemption is subject to specific oral disclosure requirements and includes the ability for a client to ‘opt-out’ of receiving some information, provided that the client is made aware of the information they may choose to receive on these products.
Given the reduction in oral disclosure requirements and the removal of some products from the PDS requirements in items [1] and [2], regulations 7.9.80C and 7.9.80D are no longer required and are omitted.
Items [4] to [7] – Amendment of paragraphs 7.7.02(1)(b) and 7.7.10(b) and new paragraphs 7.7.02(1)(c) and 7.7.10(c)
Section 9 of the Act describes an interest in a Cash Management Trust (CMT) as an interest in a registered scheme and an interest that relates to an undertaking of the kind commonly known as a cash management trust. Generally, a CMT is a type of managed investment scheme that pools investors’ funds into money market investments, usually cash and short term securities, and is relatively more liquid than some other managed investment schemes.
Cash management trusts (CMTs) are similar in nature to Basic Deposit Products (BDPs) and as such, it has been submitted that the same exemption from the PDS requirements should apply. However, CMTs are not considered to be as simple or well-understood as BDPs and consumers would therefore benefit from receiving information on these products.
Nevertheless, CMTs are relatively more straightforward than other financial products and as such, it is considered that relief may be provided from the requirement to provide a FSG and SoA, given that the more important information on these products is conveyed in a PDS.
As such, items [4] to [7] include a cash management trust interest in the exemptions from the requirements to provide a FSG and a SoA, under regulations 7.7.02 and 7.7.10 respectively.
Item [8] – New regulation 7.9.07FA – Product Disclosure Statement not required for certain specified products
Item [8] inserts a new regulation 7.9.07FA, which modifies section 1012D of the Act to specify certain products for which a PDS is not required. By inserting subsection 1012D(7A), the regulation provides that a PDS is not required for a BDP, a facility for making non‑cash payments (NCPF) that is related to a BDP, and travellers’ cheques.
If a regulated person chooses to not provide a PDS for such products, they have to inform the client as to whether there are any costs associated with the product and whether there are any amounts that will or may be payable after the acquisition of the product. The regulated person is then required to ask the client if they would like further information on those amounts and provide the client with that information, if requested.
It is not intended to mandate how the information on these products, such as fees and costs, is provided, as guidance on this is provided by industry codes of practice. However, it is expected that if such information is requested, it will be provided to clients in a clear, concise and effective manner. It is also expected that providers maintain disclosure of information on these products by ensuring this information is made available to clients upon request, at branch outlets and on their website.
BDPs are considered to be relatively low-risk and generally well-understood financial products. Nevertheless, it is important to include BDPs as part of the regulation of financial services to ensure that consumers are provided with sufficient information and that staff are adequately trained to issue and advise on these products.
While it is important that organisations offering BDPs (and related NCPFs such as ATM cards, telephone banking and Internet banking) are licensed and subject to oversight by the Australian Securities and Investments Commission (ASIC), the low‑risk nature of these products and relative consumer familiarity with them makes sophisticated and lengthy disclosure unnecessary.
Further, issuers of BDPs are subject to industry codes, such as the Code of Banking Practice and the Credit Union Code of Practice. These codes contain requirements and standard practice for disclosure in the banking industry. In addition, ASIC’s Guide to Good Transaction Fee Disclosure for Bank, Building Society and Credit Union Deposit and Payments Products contains principles for effective disclosure in relation to fees and costs on transaction accounts and was designed to promote improved disclosure.
In accordance with these good disclosure principles and as a result of a considerable increase in the use of Internet banking and Internet access generally, particularly over the past five years, there is an increasing amount of information available for consumers on fees charged by banks, building societies and credit unions that is displayed on websites in a well‑presented and comprehensible manner.
Subject to industry’s continued compliance with the good disclosure principles and requirements contained in the industry codes and guidelines, it is considered appropriate to provide relief from the requirement to provide a PDS for BDPs, NCPFs that are related to BDPs and travellers’ cheques.
Given the removal of the requirement to provide a PDS for BDPs, related NCPFs and travellers’ cheques, the disclosure provisions referring to a PDS in the anti‑hawking provisions of section 992A will not apply.
As such, item [9] amends the disclosure requirements that currently refer to a PDS for situations where a BDP, related NCPF or travellers’ cheque are offered by way of an unsolicited telephone call or other unsolicited contact. The regulation requires that, in these situations, the regulated person instead complies with the new disclosure requirements that apply to these products under paragraphs 1012D(7A)(b) to (e), if applicable.
Similar consequential amendments are not required for the advertising provisions that refer to a PDS under section 1018A. This is because section 1018A refers to issue or sale offers pursuant to which section 1012C applies or will apply, and 1012C has effect subject to 1012D, which is amended by the new regulation 7.9.07FA to remove the requirement to provide a PDS for BDPs, related NCPFs and travellers’ cheques.
Schedule 5 – Proposals 7
Item [1] – New regulations 7.9.15D, 7.9.15E and 7.9.15F – Product Disclosure Statement: general insurance product
General insurance products are subject to disclosure requirements under the Corporations Act and the Insurance Contracts Act 1984 (IC Act).
Before selling a general insurance product to a consumer, a general insurer provides that consumer with documents that meet their disclosure requirements and outlines the terms and conditions of the proposed insurance contract.
Different insurers do this in different ways. Some insurers will provide one document only, which blends PDS disclosure, IC Act disclosure and the policy terms and conditions. Other insurers will also provide one document, however, part A would contain PDS and IC Act disclosures and part B would contain the policy terms and conditions. Other insurers disclose all information through two or more documents.
Item [1] reduces the amount of information a general insurer must give to an insured to meet their PDS disclosure requirements, taking into account all of the information an insurer is required to provide under the IC Act and the information an insurer would provide through their policy terms and conditions. Item [1]:
Non-relevant PDS content requirements
The following PDS content requirements are not relevant, are of limited relevance, or are not necessary for general insurance products:
Item [1] specifies that a general insurance PDS does not need to address any of the above disclosure requirements.
However, if a general insurer believes it would be beneficial to make disclosures that would have met any of the above requirements, they may continue to do so because a general insurance PDS may include other information (subparagraph 1013C(1)(b)(i)). For example, some insurers may wish to disclose certain taxation implications.
PDS content requirements disclosed through other means
The following PDS content requirements are disclosed by the insurer through other means, such as the policy terms and conditions:
The IC Act requires insurers to disclose certain risks associated with holding a general insurance product, for example, the risks associated with not fully disclosing all relevant information to the insurer. The insurer discloses other risks associated with holding the general insurance product through the policy terms and conditions, for example, certain policy exclusions.
It is considered that insurers appropriately disclose risks without the need for further and separate disclosure through the PDS.
The policy terms and conditions, read in conjunction with the PDS, provides an insured with sufficient information on which to base a decision to acquire the product. As such, item [1] also removes the requirement in section 1013E to disclose other information that might materially influence a decision to acquire.
Hence, item [1] reduces duplication between the PDS and the policy terms and conditions. However, the abovementioned changes will occur only because item [1] also requires insurers to disclose the policy terms and conditions (and hence the information required by paragraph 1013D(1)(c) and section 1013E) in the PDS. This is explained further in the next section.
Disclosure of significant characteristics or features of the product
Item [1] requires general insurers to provide more detailed information in their PDSs to satisfy the requirement to disclose information about any other significant characteristics or features of the product or of the rights, terms, conditions and obligations attaching to the product (paragraph 1013D(1)(f)). The more detailed information is:
Currently, the PDS must contain information about other significant characteristics or features of the product or of the rights, terms, conditions and obligations attaching to the product.
As outlined above, insurers provide their clients with policy terms and conditions prior to the sale of a general insurance product. The policy terms and conditions generally disclose all characteristics and features of the product and the rights, terms, conditions and obligations attaching to the product. Therefore, paragraph 1013D(1)(f) of the Act results in general insurance PDSs listing, summarising or highlighting information provided in the policy terms and conditions.
Item [1] removes this duplication by instead requiring the policy terms and conditions to be disclosed as part of the PDS.
This does not mean that all general insurers must blend the policy terms and conditions with PDS and IC Act disclosures. However, such a practice can continue under the proposed provisions.
Those insurers that currently disclose the policy terms and conditions in the same document as the PDS, but in a separate part, can continue to do so. For example, it is intended that such insurers can comply with the provisions by disclosing all of the policy terms and conditions under a clear and separate heading.
What is no longer possible is for an insurer to provide a PDS that does not contain the policy terms and conditions of the insurance contract.
Item [1] has a consequential effect on the drafting of policy terms and conditions. By requiring them to be disclosed in the PDS, the policy terms and conditions have to be written in a ‘clear, concise and effective manner’. This requirement is in line with the recommendations of the Review of the IC Act. It also fits with the Australian Government’s commitment to reducing the amount of disclosure provided to Australian consumers, as policy terms and conditions will now have to be written concisely (if they are not already written in such a manner).
Finally, it is understood that insurers use a policy schedule, read in conjunction with the terms and conditions of a policy, to complete a contract of insurance. The policy schedule and policy terms and conditions (and sometimes other information) make up the policy document.
In general terms, the policy terms and conditions outline conditions that will apply, or can apply, to all insureds. The policy schedule, however, is usually specific to the insured. It can only be prepared after an insurer assesses the risk of the insured and after that insured nominates their desired levels of coverage. Item [1] does not require an insurer to include that policy schedule in the PDS.
It is not expected that insurers will attempt to alter the traditional content of the policy schedule as a means to avoiding providing standard terms and conditions in the PDS. If such a practice arose, however, the wording of item [1] would be restructured with a view to putting in place stricter requirements.
Item [2] – Transitional
Item [1] requires insurers to make a variety of changes to their PDSs. To ensure the costs of insurers are minimised in making such changes, item [2] introduces a transition period of 18 months during which insurers can comply with either the old or new general insurance PDS provisions. After 18 months, all insurers will be required to meet the new provisions for a general insurance PDS.
Item [3] – New regulation 7.9.07FC – Product Disclosure Statement not required for general insurance situation
The Act has the effect that a consumer will receive a PDS at the time of, or before, purchasing a general insurance product. General insurance products are renewable which means the product has a finite life. However, as the product’s life comes to an end, an insurer can give their client the option of renewing the product. Should the client accept, the insurer will re-issue the insurance product to their client.
Whether or not renewal again triggers the PDS disclosure requirements is an issue that has been interpreted differently by different insurers.
It is understood that some insurers choose to provide a new PDS to a client each time that client renews an insurance policy.
Other insurers only provide a new PDS to a client on renewal if there have been significant changes to the PDS since the client last received it. Such insurers rely on exemptions under section 1012D of the Act, which generally specify that a PDS does not have to be given to the client if they already have an up to date PDS or already have access to the up to date information.
Still other insurers use the supplementary PDS provisions to update the original PDS prior to renewal and then, at renewal, rely on the exemptions in section 1012D so that they do not have to provide a new PDS.
Item [3] attempts to resolve the issue of what disclosure requirements apply for general insurers on renewal.
Section 1012D of the Act does operate in relation to general insurance products. An insurer does not have to again give a client a PDS on renewal if the client already has an up to date PDS for that product or they already have access to the up to date information.
Item [3] clarifies that insurers can use a supplementary PDS on renewal. Item [3] creates an additional supplementary PDS provision specifically for this purpose.
Item [3] applies where an insurer issued an insurance product to a client; they provided that client with a PDS in relation to that product (the original PDS); and that product is up for renewal.
If the general insurer cannot rely on exemptions in section 1012D (for example, because certain significant provisions in the PDS have changed since the client last received it), item [3] clarifies that a general insurer has the choice of giving the client a Supplementary PDS or a new PDS.
A Supplementary PDS only needs to disclose changes that have been made to the insurance product since the client received the original PDS.
Insurers wishing to continue to provide clients with a full PDS on renewal are able to do so.
Item [4] – New paragraphs 7.7.10(d), (e), (f), (g), (h) and (i)
Industry claims that personal advice for general insurance is difficult and costly to provide. They argue that advisers are choosing not to provide personal advice to clients to avoid the costs associated with, what is considered to be, relatively simple but useful advice.
Unlike investment products, an adviser may only need to consider a few of a client’s personal circumstances to recommend an appropriate general insurance product. Industry participants have claimed that the requirement to provide such simple advice in writing is excessive.
Retail clients are relatively familiar with certain general insurance products. As such, item [4] of Schedule 5 simplifies the disclosures that an adviser must provide when giving personal advice about the following general insurance products:
Item [4] prescribes that, when giving personal advice about the above general insurance products, an adviser need not provide a SoA.
Instead, an adviser only has to provide their client with information about remuneration, commissions and conflicts of interest. Such information is important for the client wishing to weigh up the value of advice and determine the relative independence of the adviser.
While item [4] removes the SoA disclosure requirements in relation to personal advice about the above products, advisers would still be required under the Act to have a reasonable basis for any advice they provide.
Further, while a SoA is no longer required in relation to personal advice provided about the abovementioned general insurance products, it is expected that, for compliance reasons, businesses will keep a record of any advice they provide.
In relation to personal advice about consumer credit insurance products and sickness and accident insurance products, advisers still need to provide a SoA to retail clients (consumers). This is because, unlike products such as motor vehicle insurance, sickness and accident policies and consumer credit insurance policies are often complex and are not necessarily well understood by retail clients.
Further, life insurers offer sickness and accident insurance policies and consumer credit insurance policies. To ensure there is a level playing field between the life insurance and general insurance industries, advisers have to produce a SoA when giving personal advice about either type of product.
Schedule 6 – Proposals 8
Item [1] – New regulations 7.6.02AB, 7.6.02AC and 7.6.02AD – Meaning of retail client and wholesale client
Regulations 7.6.02AB-AD modify section 761G of the Act, for the purposes of interpreting Parts 7.6 to 7.9 of the Act. Specifically, regulation 7.6.02AB inserts a new paragraph 761G(7)(ca), the effect of which is that companies or trusts controlled by persons who are wholesale clients (because they meet the assets and/or income tests set out in subparagraphs 761G(7)(c)(i) and (ii)) are also considered wholesale clients.
Regulation 7.6.02AC inserts new subsections 761G(7A) and (7B) which provide that, in determining whether a person meets the asset and/or income tests referred to above, the assets and/or income of controlled companies or trusts may be taken into account. In determining whether a company or trust is controlled, the definition of ‘control’ in section 50AA of the Act applies.
Regulation 7.6.02AD modifies section 761G by inserting a new subsection 761G(4A). The new subsection provides that, where a body corporate (body corporate A) is a wholesale client in respect of a particular financial service or product, bodies corporate that are related to body corporate A are also to be treated as wholesale clients in respect of that financial product or service. Section 50 of the Act defines when bodies corporate are related.
It is not necessary for a financial service or product to actually be provided to body corporate A, in order for related bodies corporate to take advantage of the provision. It is sufficient that, had the financial service or product in question been provided to body corporate A, it would have been provided to it as a wholesale client. If this is the case, then related bodies corporate can also be regarded as wholesale clients in respect of the provision to them of that financial service or product.
Item [2] – New regulation 7.6.02AE – Definition of professional investor
This item inserts regulation 7.6.02AE, which adds a new criteria of having $10 million in gross assets into paragraph (e) of the definition of professional investor in section 9 of the Act (adding to the existing criteria of controlling $10 million).
The definition of control in section 50AA of the Act will not generally be appropriate for determining control under this paragraph (because section 50AA relates to control of an ‘entity’). However, no separate definition of control is included for the purposes of paragraph (e) of the definition of professional investor.
Rather, control is to be given its ordinary meaning which, according to the 2003 edition of the Macquarie Dictionary is “to exercise restraint or direction over ...” .
In order to remove doubt about the interpretation of paragraph (e) of the definition of professional investor, the assets to which that paragraph refers do not have to be held for the purposes of investment.
Items [3] and [4] – New regulations 6D.5.02 and 7.6.02AF – Renewal period for accountants’ certificates
Item [4] of Schedule 6 inserts regulation 7.6.02AF, which modifies paragraph 761G(7)(c) of the Act. It extends the time during which an accountant’s certificate relating to a person’s assets or income is current from 6 months to 24 months.
Item [3] makes a similar amendment to paragraph 708(8)(c) in Chapter 6D, relating to securities (regulation 6D.5.02).
The significance of an accountant’s certificate attesting to a person’s assets or income is that it is used to determine whether the person qualifies as a wholesale client in respect of the provision of particular financial products under Chapter 7 of the Act, or as a sophisticated investor in respect of offers of securities under Chapter 6D of the Act.
In extending the currency of the certificate from 6 to 24 months, there is an increased likelihood that the person’s asset or income levels may change, such that the certificate may not accurately reflect their circumstances.
While it is not a specific requirement in the legislation, if a person to whom an accountant’s certificate relates notifies the provider of a financial product or offeror of securities that the certificate no longer accurately reflects the person’s assets or income, with the effect that the client no longer qualifies as a wholesale client or sophisticated investor, then the provider of the financial service or offeror of securities can not continue to rely on the certificate.
In such circumstances, continued reliance on a certificate which was known to be inaccurate will be considered a breach of the requirement in section 912A of the Act that a financial services licensee must do all things necessary to ensure that the financial services covered by the licence are provided efficiently, honestly and fairly.
Schedule 7 – Proposals 9
Item [1] – New subregulation 7.7.02(7)
This item inserts new subregulation 7.7.02(7), which provides that certain financial service providers (referred to as secondary service providers) are not required to give a Financial Services Guide (FSG) to a retail client, if relevant conditions are met.
Subregulation 7.7.02(7) proceeds on the basis that, where the secondary service provider would not be taken to be providing a financial service to a client if it were not for the operation of section 52 of the Act (which states that a reference to doing an act or thing includes a reference to causing or authorising the act or thing to be done), then the secondary service provider does not have to give the client a FSG.
This is subject to the secondary service provider having a written agreement with the intermediary (that is, a licensee or authorised representative who provides or passes on the financial service to the retail client) to the effect that the intermediary will either make the secondary service provider’s FSG available to the client, or inform the client how to obtain it (for example, by directing the client to a website where the FSG can be viewed and/or downloaded).
The new subregulation does not otherwise alter any obligations the secondary service provider or the intermediary may owe to the retail client, or any liability they may have to the client in respect of the provision of the financial service.
Schedule 8 – Proposal 10.1
Item [1] – New regulation 7.1.33G – Certain general advice that does not attract remuneration etc.
Regulation 7.1.33G recognises that in certain cases advice should be able to be provided (such as about a class or range of financial products, educational or other financial market information) without constituting the provision of a financial service.
Specifically, under regulation 7.1.33G, a person is not taken to provide a financial service:
– the advice is not intended to influence another person to make a decision in relation to a particular financial product or an interest in a particular financial product; or
– the advice could not reasonably be regarded as being intended to have such an influence in respect of a particular financial product or an interest in a particular financial product; and
The conditions outlined above are intended to ensure the objectivity and generality of the advice being provided. Advice that meets the above circumstances is less likely to have the intention of influencing a person to acquire a particular financial product – and hence poses less of a financial risk to consumers.
New regulation 7.1.33H – Certain general advice given by a financial product issuer
Regulation 7.1.33H recognises that, in certain cases, financial product issuers should be allowed to provide advice to consumers and existing clients about their own products, without that advice constituting the provision of a financial service. This is because product issuers have the relevant expertise about their own products to provide general advice and information.
However, where an issuer chose to provide unlicensed advice, regulation 7.1.33H imposes certain safeguards.
All safeguards apply where an issuer is providing advice intended to influence a consumer or existing client to purchase one of their products. These safeguards require the issuer to:
However, if the advice is provided to an existing client and is about a product that the client already holds, then not all of the safeguards are necessary. In such circumstances, it is sufficient for an issuer to simply make the client aware that they are not a licensed adviser.
Schedule 9 – Proposal 11
Items [1] to [4] – Amendment of paragraph 7.5.07(4)(d) and subparagraph 7.6.01(1)(na)(ii), omission of paragraph 7.6.01(1)(ma) and new regulations 7.6.02AG and 7.6.02AH.
Item [1] makes a consequential amendment to paragraph 7.5.07(4)(d) to include references to new subsections 911A(2A) to (2E), which are inserted by item [4].
Item [2] omits current paragraph 7.6.01(1)(ma). This paragraph provides an exemption from the licensing requirements in respect of dealings in certain financial products. This exemption is no longer required when new subsection 911A(2C) commences (see item [4]).
Item [3] amends current subparagraph 7.6.01(1)(na)(ii). This paragraph provides a licensing exemption in respect of certain financial services provided to wholesale clients in this jurisdiction. The exemption in the paragraph is subject to various requirements, including that the provider of the service is not in this jurisdiction and is a related body corporate of an AFSL holder, or is a party to a joint venture with an AFSL holder, and that AFSL holder’s licence covers the provision of the financial service. The AFSL holder’s licence must also contain a condition requiring it to assume responsibility for the service provider in respect of the financial service.
The amendment means that the licensing exemption applies not only in respect of financial services provided to wholesale clients, but all clients. The other requirements of the paragraph will not change.
Item [4] inserts regulation 7.6.02AG, modifying section 911A of the Act by inserting new subsections (2A) to (2E). These new subsections provide exemptions from the need for foreign financial service providers to obtain an AFSL in relation to the provision of certain financial services, subject to various conditions.
Subsection 911A(2A) provides clarification that the provision of a financial service to an Australian citizen or resident does not, of itself, mean that the provider of the service needs to be licensed under the Act.
If the service is provided from outside of this jurisdiction to an Australian citizen or a person resident in Australia, by a financial service provider who is outside of the jurisdiction, and the service provider does not engage in conduct which is intended to induce people in this jurisdiction to use the service, or conduct which is likely to have that effect, then provision of the service does not attract the licensing requirements of the legislation, regardless of where the Australian citizen or resident is located.
The requirement that the service provider not engage in conduct intended to induce people in this jurisdiction to use the service, or conduct likely to have that effect, reflects the requirements of section 911D of the Act, which describes when a person will be considered to be conducting a financial services business in this jurisdiction.
Subsection 911A(2B) provides that a financial service provided by a financial service provider who is outside the jurisdiction, and who is a participant in a financial market in Australia licensed under subsection 795B(2) of the Act (that is, a market licensed in Australia which is the same as a market that the market operator is authorised to operate in the foreign country where its principal place of business is located) will not require the provider to obtain a licence, where the person to whom the financial service is provided is also outside the jurisdiction (or the service provider reasonably believes this is so), and the service relates to a financial product traded on the licensed market.
Subsection 911A(2C) provides an exemption from the licensing requirements in respect of financial services provided by a financial services provider who is not in this jurisdiction to an AFSL holder or to persons exempt from the need to hold an AFSL under paragraph 911A(2)(h) – that is, providers of services to wholesale clients where the provider is regulated by an overseas regulatory authority and ASIC has specified the service.
Subsection 911A(2C) also contains a requirement that the person to whom the financial service is being provided must be acting on its own behalf in relation to the provision of the service, and not, for example, in the capacity of trustee of a trust or responsible entity of a registered managed investment scheme.
Subsection 911A(2D) provides a licensing exemption in two situations. The first is where a person acquires a financial product from a financial service provider who is outside the jurisdiction while the person is also outside the jurisdiction, and the person who acquires the product subsequently travels to Australia and wishes to continue the relationship with the service provider in respect of the product.
The second situation is where a person in Australia chooses to acquire a financial product from a financial service provider who is outside the jurisdiction (an example is a person in Australia arranging insurance cover with a foreign insurer over property the person owns overseas). In this second scenario, the person who acquires the product must have initiated the contact with the service provider which results in the acquisition of the product.
Other conditions also apply in relation to the exemption from the licensing requirements under new subsection 911A(2D).
In particular, paragraph 911A(2D)(d) provides that the financial service provider (referred to as person 1) must not actively solicit persons in this jurisdiction in relation to the relevant financial products (the financial products covered by the subsection are discussed further below).
The expression ‘actively solicit’ is not defined. However, it connotes some positive action on behalf of person 1 aimed at attracting people in Australia to acquire financial products.
Conduct which might be considered to be intended to induce people in this jurisdiction to use financial services, or conduct likely to have that effect (which is the ‘test’ set out in subsection 911D(1) of the Act to determine whether a person is carrying on a financial services business in this jurisdiction) may not constitute active solicitation. Put another way, the conduct described in subsection 911D(1) is broader than that contemplated by active solicitation.
The following examples are provided by way of guidance.
If person 1 (that is, a financial service provider not in this jurisdiction) has a website on which it promotes its financial products, and that website is accessible by people in Australia, the website generally will not constitute active solicitation of people in Australia, unless the content of the website is such that it is clear to a reasonable person that the promotion of the financial products is directed specifically or primarily at people in Australia, rather than, for example, being directed towards any potential customers of person 1, regardless of where they are located.
Similarly, if person 1 places advertisements relating to its financial products in a newspaper or other periodical whose place of publication is an overseas country, and that newspaper or periodical is also available in Australia, those advertisements will not be considered to be actively soliciting people in Australia unless, given the content of the advertisements, it is clear to a reasonable person that they are primarily directed at people in Australia.
In contrast, if person 1 advertises its financial services or products in newspapers or other periodicals which are published and primarily circulate in Australia, or if person 1 directly contacts people in Australia (by whatever means – including telephone, e‑mail or mail), that conduct will be considered to constitute active solicitation and hence, the licensing exemption in proposed subsection 911A(2D) will not apply.
Despite the restriction on actively soliciting people in this jurisdiction, once a financial product described in paragraph 911A(2D)(c) has been acquired by a person, the provider of the product is able to maintain contact with the person in relation to the product (for example, to provide information and carry on the usual relationship between a financial service provider and its clients). This is the effect of paragraph 911A(2D)(e).
Subsection 911A(2D) applies not only to the initial product acquired, but also to products which are of the same kind as the initial product, as well as products which supplement the initial product (examples of which are provided in notes to the subsection).
Where a financial product acquired by a person (such as an investment account) involves a discretion for the product provider or some other party to select and/or deal in financial products which underlie the acquired product, any issue, acquisition, disposal, or variation in the composition of those underlying financial products will not constitute the provision of a new financial product to the client. Rather, such dealing will be considered to be a financial service related to the initially acquired product, and hence come within the licensing exemption.
Similarly, if financial services (such as financial advice, or custodial or depository services) are provided in relation to the underlying financial products, these services also relate to the initially acquired product (that is, the investment account itself).
An example of a financial product that might involve a discretion to deal in underlying financial products is an account opened with a broker/dealer in the United States of America (US) pursuant to Individual Retirement Arrangements regulated under US legislation. Such accounts may attract taxation concessions under US law, and may be opened by persons working in the US wishing to plan for their retirement (they are similar in many respects to superannuation accounts or RSAs in Australia).
However, subsection 911A(2D) does not apply where a different kind of financial product is substituted for the original product acquired. For example, it does not apply if an insurance product is initially acquired from a foreign financial service provider while the client is overseas, but on return to Australia the client disposes of the insurance product and acquires a deposit product from the same provider.
Subsection 911A(2E) provides an exemption from the licensing requirements in respect of the provision of a financial service by a financial service provider who is not in this jurisdiction, where the person to whom the service is provided is a professional investor (as defined in section 9 of the Act), and the service consists of any or all of the following – dealing in, advising on, or making a market in, derivatives or foreign exchange contracts.
Item [4] also inserts regulation 7.6.02AH, which makes a consequential modification to paragraph 911B(1)(e) of the Act to include references to new subsections 911A(2A) to (2E).
Item [5] – New Division 6 of Part 7.7 and new regulation 7.7.21 – Exemption from application of Part 7.7 of the Act
Item [5] inserts regulation 7.7.21, which provides that the disclosure provisions in Part 7.7 of the Act do not apply to a financial services licensee or an authorised representative in respect of financial services provided to retail clients who are not in this jurisdiction.
Item [6] – New regulation 7.9.07FB – Product Disclosure Statement not required if client not in this jurisdiction
Item [6] inserts regulation 7.9.07FB which modifies section 1012D of the Act (which sets out situations in which a PDS does not have to be given) by inserting a new subsection 1012D(8A) to provide that a PDS does not have to be given to a client in a recommendation situation, an issue situation, or a sale situation, if the client is not in this jurisdiction.
Essentially, therefore, a PDS is not required where financial products are recommended, issued or sold to retail clients overseas. However, where the person to whom the product is recommended, issued or sold is in Australia, the requirement to provide a PDS remains (unless some other exemption from the requirement to provide a PDS applies).
Item [7] – New Division 14 of Part 7.9 and new regulation 7.9.98 – Certain providers of financial services exempted from the requirements of Parts 7.7, 7.8 and 7.9 of the Act
Item [7] inserts regulation 7.9.98, which provides that persons who provide financial services in the circumstances to which subsections 911A(2A) to (2E) apply (see item [4]) – and are thereby exempt from the licensing requirements in respect of the provision of those financial services – are also exempt from the disclosure and other requirements of Parts 7.7, 7.8 and 7.9 of the Act.
Schedule 10 – Proposal 12.1
Item [1] – New Part 7.6A and new regulation 7.6.08 – authorised representatives
Subregulation 7.6.08(1) modifies section 916B of the Act. The effect of the modification is that any authorised representative of a financial services licensee may appoint or ‘sub-authorise’ individuals to provide financial services on behalf of the licensee, if they meet the conditions of section 916B, which include that the licensee must consent to the appointment. At present only authorised representatives who are bodies corporate may sub-authorise individuals.
Under regulation 7.6.08, an authorised representative that sub-authorises an individual is referred to as the authoriser.
An individual who is sub-authorised will not, in that capacity, be able to sub‑authorise other individuals. This limitation is imposed by a new subsection 916B(3A) inserted by subregulation 7.6.08(2).
Subregulation 7.6.08(3) modifies section 916F of the Act, such that the expanded range of authorised representatives that are able to sub-authorise individuals are also able to make use of subsection 916F(1AA). That subsection provides that notification to ASIC of the appointment of sub-authorised individuals is not required if certain conditions are met. These conditions include that the sub-authorised individuals are:
In relation to the last dot point, in order to come within subsection 916F(1AA) a sub‑authorised individual may only provide general advice on and/or deal in financial products listed in the regulations. Regulation 7.6.04A currently prescribes these products as basic deposit products and related non-cash payment facilities, and general insurance products (although regulation 7.6.04A is amended by items [1] and [2] of Schedule 11).
Current regulation 7.6.04B modifies subsection 916F(1AA) by inserting an additional subparagraph (iii) into paragraph 916F(1AA)(d) to include personal advice about a basic deposit product or a related non-cash payment facility in the category of financial services that a sub-authorised individual may provide under the subsection.
The modifications made by regulation 7.6.04B are incorporated into the new modified subsection 916F(1AA).
In respect of those sub-authorised individuals whose appointment is not required to be notified to ASIC, there will be a requirement that the authoriser provides information about the individuals if requested – for example, by a member of the public (new paragraph 916F(1AA)(e)).
That information will include:
Items [2] to [8] – Omission of regulation 7.6.04B, substitution of subregulation 7.7.05B(1), amendment of subregulation 7.7.05B(3), amendment of paragraphs 7.7.05B(3)(b) and 7.7.05B(3)(c), amendment of subparagraph 7.7.05B(3)(d)(ii) and saving of regulation 7.6.04A
Items [2] to [8] of Schedule 10 make consequential amendments to:
Schedule 11 – Miscellaneous amendments
Items [1] and [2] – Amendment of paragraph 7.6.04A(c) and new paragraphs 7.6.04A(d) and (e)
Items [1] and [2] of Schedule 11 amend regulation 7.6.04A to include two additional products – consumer credit insurance and cash management trust interests.
The effect of this amendment is that ‘sub-authorised’ individuals may provide general advice that relates to, and/or may deal in, consumer credit insurance products and cash management trust interests, without their appointment having to be notified to ASIC, provided that the other requirements of subsection 916F(1AA) of the Act are met. It should be noted that subsection 916F(1AA) is amended by item [1] of Schedule 10.
Item [3] – New regulation 7.9.07K – Definition of defective: Product Disclosure Statement or Short-Form Product Disclosure Statement
Item [3] of Schedule 11 inserts regulation 7.9.07K, which modifies section 1022A of the Act. The effect of the modification is to add a new criterion to the definition of defective in relation to a PDS, such that a PDS would be defective under section 1022A if it is not prepared in accordance with section 1013A – which specifies who must prepare the PDS.
The regulation also specifies that the modified definition of defective applies to Short-Form PDSs, which are introduced by the amendments in Schedule 3.
Items [4] and [5] – New regulations 7.9.15G and 7.7.10AH – Business days
Items [4] and [5] of Schedule 11 insert regulations 7.9.15G and 7.7.10AH. The new regulations respectively modify paragraphs 1019B(3)(b) and 946C(3)(c) of the Act to change references in those provisions from “5th day” and “5 days” to “fifth business day” and “5 business days”.
The effect of the modifications is that the time within which SoAs must be given in time-critical situations is made more generous (regulation 7.7.10AH), as is the time before which the cooling-off period starts for those financial products which have cooling-off rights attaching to them (regulation 7.9.15G).
Similar changes to the time within which FSGs and PDSs may be given under subsection 941D(4) and 1012G(3) are made by modifications to those subsections in Schedule 1, Part 2 and Schedule 4, Part 1 respectively.