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CORPORATIONS AMENDMENT REGULATIONS 2007 (NO. 12) (SLI NO 324 OF 2007)
Select Legislative Instrument 2007 No. 324
Corporations Act 2001
Corporations Amendment Regulations 2007 (No. 12)
Subsection 1364(1) of the Corporations Act 2001 (the Act) provides that the Governor‑General may make regulations, not inconsistent with the Act, prescribing matters required or permitted by the Act to be prescribed, or necessary or convenient to be prescribed for carrying out or giving effect to the Act.
The Corporations Amendment Regulations 2007 (No. 12) (the Regulations) specify that:
• a financial services licensee must include its licence number whenever it identifies itself in a Replacement Product Disclosure Statement (PDS);
• a Record of Advice (ROA) may be used to document personal advice (instead of the usual Statement of Advice (SOA)), when such personal advice concerns either small investments or does not make a purchase or sale recommendation and the adviser does not receive any remuneration for the provision of the advice;
• the small investment monetary threshold is set at $15,000;
• the ROA used in the abovementioned circumstances must contain certain elements;
• an authorised representative is exempt, in a limited set of circumstances, from having to provide its name and contact details in a Financial Services Guide (FSG);
• the definition of ‘publication date’ be deleted from the Principal Regulations because the definition is not used anywhere in the regulations;
• the definition of ‘defective’ contained in the Principal Regulations applies to Replacement Product Disclosure Statements (PDSs);
• regulation 7.9.13A of the Principal Regulations be removed. It amends section 1016E of the Act and is being removed because it was superseded by later amendments made to section 1016E;
• a licensee would not be jointly and severally liable for the conduct of its authorised representatives where they provide financial services in relation to certain kinds of financial products;
• an entity providing general advice is exempt, in a limited set of circumstances, from the requirement to give the client an FSG; and
• the particular circumstance for lodgement with the Australian Securities and Investments Commission (ASIC) of a notice by a responsible person arises when a change is made to the enhanced fee disclosure table contained in a Statement (either a PDS or Supplementary PDS).
Details of the proposed Regulations are set out in the Attachment.
The Act specifies no other conditions that need to be satisfied before the power to make the proposed Regulations may be exercised.
The Regulations are a legislative instrument for the purposes of the Legislative Instruments Act 2003.
Regulations 1 to 3 and Schedule 1 to the Regulations commence on the day after the Regulations are registered on the Federal Register of Legislative Instruments. Schedule 2 commences on the commencement of items 218 and 219 of Part 3 of Schedule 1 to the Corporations Legislation Amendment (Simpler Regulatory System) Act 2007. Schedule 3 commences on 1 July 2008.
ATTACHMENT
Details of the Corporations Amendment Regulations 2007 (No. 12)
Regulation 1 – Name of Regulations
This regulation provides that the title of the Regulations is the Corporations Amendment Regulations 2007 (No. 12).
Regulation 2 – Commencement
This regulation provides that regulations 1 to 3 and Schedule 1 of the Regulations commence on the day after the Regulations are registered on the Federal Register of Legislative Instruments. Schedule 2 commences on the commencement of items 218 and 219 of Part 3 of Schedule 1 to the Corporations Legislation Amendment (Simpler Regulatory System) Act 2007. Schedule 3 commences on 1 July 2008.
Regulation 3 – Amendment of Corporations Regulations 2001
This regulation provides that the Corporations Regulations 2001 (Principal Regulations) are amended as set out in Schedules 1, 2 and 3.
Schedule 1 – Amendments
Items [1] and [2] – Paragraphs 7.6.01C(1)(h) and (i)
The Corporations Legislation Amendment (Simpler Regulatory System) Act 2007 (SRS Act) allows the use of a Replacement Product Disclosure Statement (PDS) to correct errors or omissions in a PDS for listed stapled securities. A stapled security consists of both an interest in a managed investment scheme and a security which cannot be disposed of separately and must be traded as a single unit. The two components of the stapled security are an interest in the trust holding the assets of the entity (an interest in a managed investment scheme) and a share in the company carrying out the asset management and/or development functions (a security).
Items 1 and 2 of the Regulations clarify that a financial services licensee must include its licence number whenever it identifies itself in a Replacement PDS, as required by subregulation 7.6.01C(1) of the Principal Regulations and subsection 912F(1) of the Act. A Replacement PDS, introduced in the SRS Act, is used to correct errors or omissions in a PDS for listed stapled securities.
Item [3] –Subregulation 7.7.05B(2A)
Item 3 inserts a new subregulation 7.7.05B(2A), in a limited set of circumstances, which exempts authorised representatives from having to provide their name and contact details in the Financial Services Guide (FSG).
Some deposit-taking institutions adopt a franchise structure when operating their business such that the franchisor holds the financial services licence under which the franchisees then provide financial services.
In order to be able to provide financial services under the franchisor’s licence, each franchisee is typically appointed as an authorised representative of the franchisor under subsection 916A(1) of the Act. Further, bodies corporate which are authorised representatives may sub‑authorise employees of the franchisee to provide specified financial services under subsection 916B(3) of the Corporations Act 2001 (the Act).
In some cases, individual employees of the franchisee may be directly appointed as authorised representatives of the licensee (franchisor).
The Act requires authorised representatives or corporate authorised representatives to provide an FSG, which includes their individual details, to any person to whom they are providing a financial service.
As a consequence, each franchisee must produce individualised FSGs identifying the name and contact details of each individual franchisee, or where an individual employee has been appointed an authorised representative, the individual employee.
In contrast, non-franchise banks typically hold a financial services licence and all employees of the bank’s branches are captured as representatives under the umbrella of that licence as per subsection 911A(2) of the Act. The employees are able to provide financial services without the need to be appointed as an authorised representative. This means that the details in the FSG of the licensed entity capture all persons providing financial services and need not be reproduced to include any individual employee’s details.
The subregulation provides an exemption from the requirement to provide individualised FSGs for each franchisee that is a corporate authorised representative or each employee of that franchisee. It also exempts each individual employee from having to provide their name and contact details in the FSG. However, this exemption is limited to dealing in financial products and the provision of general advice (it would not extend to the provision of personal advice).
This exemption is subject to the following conditions:
• the person must either be a corporate authorised representative of a financial services licensed franchisor or an employee of the franchisee of a financial services licensed franchisor;
• the franchisor must be an authorised deposit‑taking institution and be regulated by the Australian Prudential Regulation Authority (APRA);
• the franchise agreement must subject the corporate authorised representative or employee to the policies of the franchisor and require compliance with any policies made by the franchisor to give effect to the franchisor’s obligations under its financial services licence; and
• the standardised FSG produced by the franchisor must clearly explain that the franchisor takes responsibility for the services provided by the franchisee or employee.
Item [4] – Regulation 7.7.08C
Item 4 inserts a new Division 2B titled Record of small investment advice.
The Act defines the circumstances in which personal advice is provided to a client. The provision of personal advice triggers the requirement in the Act to document that advice in a Statement of Advice (SOA). The SRS Act introduced a threshold into the SOA requirements, so that a full SOA is only be required if the advice given is in relation to an investment amount that is above a certain monetary threshold. Instead of a full SOA in this situation, the adviser is permitted to provide a Record of Advice (ROA) to the client. Advice below the monetary threshold is known as ‘small investment advice’.
Subsection 946AA(4) of the SRS Act requires the providing entity to keep a record of the small investment advice in a ROA. The new regulation 7.7.08C sets out the matters that an ROA is required to include, being:
• brief particulars of the recommendations made to the client, and the basis on which the recommendations are made;
• brief particulars of the information required by subsections 947D(2) and (3) of the Act if the advice recommends replacement of one financial product with another. These subsections primarily require disclosure in relation to charges, pecuniary interests and significant costs; and
• the information required by paragraphs 947B(2)(d) and (e) or paragraphs 947C(2)(e) and (f) of the Act as if an SOA were given to the client. These paragraphs require information about any remuneration or other benefits that the providers set out in the paragraphs are to receive that might reasonably be expected to be or have been capable of influencing the providing entity in giving the advice. They also require information about any other interests or associations or relationships of the providing entity or associate that might reasonably be expected to be or have been capable of influencing the providing entity in giving the advice.
Item [5] –Regulation 7.7.09A
Item 5 inserts a new regulation which sets the small investment advice monetary threshold at $15,000. The small investment advice provision permits an exemption from the requirement to provide an SOA when providing personal advice where the value of the investment to which the advice relates does not exceed the threshold of $15,000.
The new regulation also sets out the financial products to which the threshold relates and the method for calculating the threshold in relation to those products. Different methods are required for calculating the threshold in relation to financial products with different characteristics, for example, the requirement to make future payments or ongoing commitments.
The threshold for financial products with determinable, finite investment commitments is worked out, in conjunction with the requirements of subsection 946AA(2) of the Act, as the amount of the total investment that is committed by the investor if the advice is taken in relation to the financial products set out in subregulation 7.7.09A(2).
The threshold for financial products with ongoing financial commitments is worked out, in conjunction with the requirements of subsection 946AA(2) of the Act, as the amount of the initial investment and any other amounts that are committed to by the investor if the advice is taken in relation to the financial products in subregulation 7.7.09A(5).
Where the commitments are ongoing and not finite, the value of the commitments is calculated for the 12 months from the time the advice is required to have been given.
The threshold for small investment advice related to the disposal of any of the financial products set out in paragraphs 7.7.09(2)(a) to (f) is calculated to include the total value of all financial investments that would be disposed of by the client if the advice were to be accepted by the client. The threshold in relation to the disposal of any of the financial products in 7.7.09(5)(a) to (c) is calculated to include both the value of the total divestment and any other amounts reasonably related to the divestment that are expended if the advice is taken.
Where the total value of the investment (as per subsection 946AA(2) of the Act) to which the advice relates is not reasonably ascertainable, the value is deemed to exceed the threshold amount and therefore the exemption does not apply. Where an investment is jointly held, the threshold applies to the total value to which the advice pertains.
The regulation also sets out when the ROA must be given. The ROA is required to be given to the client when or as soon as practicable after the advice is provided, and in any event before the providing entity provides the client with any further financial service that arises out of or is connected with that advice.
If the ROA is not provided at the time the advice is provided, the client needs to be given at the time a statement containing:
• the information required by paragraphs 947B(2)(d) and (e) or paragraphs 947C(2)(e) and (f) of the Act which primarily relate to remuneration or benefits, and information about relationships and associations capable of influencing the advice given; and
• the information required by section 947D of the Act (if applicable) relating to additional information when the advice recommends the replacement of one product with another.
Where a client expressly requests a further financial service to be provided immediately, or by a specified time, and the further financial service is related to the investment advice given to the client, and it is not reasonably practicable to give an ROA to the client before the further service is provided, then the regulations set out the requirements for the providing entity to give the client the ROA at a later time.
Item [6] – Regulation 7.7.10AAA
Item 6 inserts a regulation that sets out the content requirements for an ROA relied on under subsections 946B(7)(8) and (9) of the Act where a providing entity provides personal advice that does not include a recommendation to purchase or sell a financial product and no remuneration is received by the adviser. The providing entity is required to keep a record of the advice given in the form of an ROA.
The ROA is required to set out:
• the advice given to the client by the providing entity;
• brief particulars of the recommendations made and the basis on which the recommendations are made; and
• the information that if an SOA were to be given, is required in the statement by paragraphs 947B(2)(d) and (e) or paragraphs 947C(2)(e) and (f) of the Act.
Item [7] - Subregulation 7.9.01(1)
Item 7 deletes the definition of ‘publication date’ in subregulation 7.9.01 (1) of the Principal Regulations, as this definition is not used anywhere in the Principal Regulations.
Item [8] – Regulation 7.9.07K
This item replaces regulation 7.9.07K with the new regulation to clarify that the definition of ‘defective’ contained in section 1022A of the Act applies to Replacement PDSs with a slight modification to the effect that a document to which this regulation applies must not contravene section 1013A and 1013C of the Act. Section 1013A contains provisions regulating who is responsible for the preparation of a PDS, and section 1013C sets out the main content requirements for PDSs.
Item [9] – Regulation 7.9.13A
Item 9 removes regulation 7.9.13A from the Principal Regulations. This regulation was inserted into the Principal Regulations in 2003 and makes certain modifications to section 1016E of the Act. The Financial Services Reform Amendment Act 2003 subsequently made further amendments to section 1016E of the Act which in effect superseded the changes made in regulation 7.9.13A. This regulation can therefore be removed without affecting the operation of section 1016E of the Act.
Schedule 2 – Amendments commencing on the commencement of items 218 and 219 of Part 3 of Schedule 1 to the SRS Act
Item [1] – Regulation 7.1.04CA
The SRS Act provides that the joint and several liability of financial services licensees for the conduct of their authorised representatives does not apply where the authorised representative is cross‑endorsed in relation to different kinds or sub‑classes of financial product by each licensee.
Cross-endorsement is the practice whereby insurance companies consent to insurance agents who act for a number of insurance companies being the authorised representative of each insurer.
Item 1 of Schedule 2 inserts a new regulation 7.1.04CA to provide that licensees are not jointly and severally liable for the conduct of their authorised representatives where they provide financial services in relation to the following kinds of financial product:
• motor vehicle insurance;
• home building insurance;
• home contents insurance;
• sickness and accident insurance;
• consumer credit insurance; and
• travel insurance.
The conduct relates only to the specific kinds of financial products contained in the regulation.
Item [2] – Subregulation 7.7.02(2)
Subsection 941C(4) of the Act permits an entity which is providing general advice not to give the client an FSG where the general advice is provided to the public, or a section of the public, in the manner prescribed in the regulations.
Previously, the exemption from providing an FSG for general advice only applied to public forums. Subregulation 7.7.02 (2) of the Principal Regulations defines a ‘public forum’.
Item 2 of Schedule 2 replaces subregulation 7.7.02(2) of the Principal Regulations with a set of prescribed limited circumstances in which an entity providing general advice is exempt from the requirement to give the client an FSG. The prescribed circumstances include:
• providing general advice to the public, or a section of the public, at any event organised by or for financial services licensees to which retail clients are invited. For example, giving a public lecture or seminar for retail clients, including employees of a workplace, is a prescribed circumstance;
• a broadcast of general advice to the public, or a section of the public, that may be viewed or heard by any person. For example, television or radio broadcasts are prescribed circumstances; and
• distributing or displaying promotional material that both provides general advice to the public, or a section of the public, and is available in a place that is accessible to the public. For example, distributing promotional material contained in newspapers and magazines are prescribed circumstances.
Schedule 3 – Amendment commencing on 1 July 2008
Item [1] – Regulation 7.9.16T
Item 1 inserts a new regulation 7.9.16T to clarify a provision introduced in the SRS Act.
Subsection 1015D(2) of the Act requires a person responsible for the lodgement with ASIC of a notice in relation to a Statement (either a PDS or Supplementary PDS) to lodge the notice if certain circumstances occur. Currently, one of the circumstances for lodgement of a notice is when a change is made to fees and charges set out in the Statement.
This new regulation clarifies that in fact the particular circumstance for lodgement arises when a change is made to the fees and costs template required by the enhanced fee disclosures contained in the Statement, rather than simply the fees and charges set out in the Statement.
The enhanced fee disclosures refer to the requirements for the disclosure of fees and charges in PDSs for superannuation and managed investment products. The Fees and Costs template is a standardised fee template that simplifies the disclosure of fees and costs and allows for more effective comparison across products. The template is set out in items 201 and 202 of Schedule 10 to the Corporations Regulations 2001.
Consultation
Significant consultation was undertaken regarding the development of the Regulations.
Initial proposals for the majority of the items were consulted on as part of either the Corporate and Financial Services Regulation Review Consultation Paper (April 2006) or the Corporate and Financial Services Regulation Review Proposals Paper (November 2006) released by the Parliamentary Secretary to the Treasurer.
Following these consultations, the Corporations Legislation Amendment (Simpler Regulatory System) Act 2007 (SRS Act) was enacted in June 2007 with bipartisan support. Its accompanying Explanatory Memorandum explained that supporting regulations would be required as a consequence of some of its provisions.
On 19 June 2007, the Parliamentary Joint Committee on Corporations and Financial Services (PJC) reported on its Inquiry into the Corporations Legislation Amendment (Simpler Regulatory System) Bill 2007 and related bills after a one-month public consultation period and a public hearing. Item 1 of Schedule 3 of the Regulations resulted from the consultation and discussion in the PJC inquiry. The PJC inquiry noted that submissions indicated general support for the Record of Advice (ROA) proposals, with many focusing on the information that ROAs should contain. Items 4, 5 and 6 of Schedule 1 of the Regulations deal with these comments by setting out the matters that an ROA is required to include.