FINANCE LAW Topic 6: Australian Financial Services Licensees Learning objectives Once you have completed this part of the topic you should understand: What are \"financial services\" and what is meant by \"financial product advice\". The difference between wholesale & retail clients When an entity or person is required to have an Australian Financial Services Licence ('AFSL') What factors ASIC considers when deciding whether or not to issue an AFSL Who are a Licensees' 'Representatives' The obligations of Licensees & Representatives under the Corporations Act and the sanctions that apply for noncompliance The consequences of an unlicensed person providing financial services 2 What are financial services? A person provides a \"financial service\" if they: Provide \"financial product advice\" Deal in a \"financial product\" Operates a registered Managed Investment Scheme 3 Personal / general (financial product) advice Personal advice: Adviser has considered one or more of person's objectives, financial situation and needs or A reasonable person might expect adviser to have done so. General advice: Any other advice 4 Wholesale & retail clients A person is a wholesale client if: Price / value of financial product: $500,000+ or Financial product /service provided to Business that isn't a small business (not examinable) Professional investor Sophisticated investor Person with Net assets: $2.5M+ and Annual income: $250,000+ for the last two financial years 5 Sophisticated investors Licensee satisfied on reasonable grounds that client has sufficient experience to assess: Merits & value of financial product or service Risks associated with holding product His / her own information needs and Adequacy of information given by licensee & product issuer Licensee must give client a written statement of its reasons and client must sign an acknowledgment that licensee hasn't given client a PDS* or other document that it would give a retail client and doesn't owe client any obligation that it would owe a retail client. *Product Disclosure Statement 6 Australian Financial Services Licence* Anyone carrying on a financial service business in Australia must hold an AFSL. Exemptions: Representatives of Licensee General media investment advice APRA regulated body 7 The Accountants Exemption* Exemption ends 1 July 2016 Accountants can apply for a 'limited' AFSL to provide financial advice on SMSFs and 'class of product' advice in relation to: superannuation products; securities; simple managed investment schemes; general and life insurance; and basic deposit products. 8 Representatives ('Reps') Anyone who provides a financial service on behalf of another person Reps may be: Employees or directors of a Licensee Authorised Representatives ('Authorised Reps') Appointed by Licensee (by written notice) to provide financial services on its behalf, these notices may also be revoked by the Licensee 9 Representatives Licensees are liable for losses caused by Reps even if the Reps acts/operates outside of their authority Newman v Financial Wisdom Offence to pretend to be a Licensee / Rep ASIC keeps a public register of Licensees and Authorised Reps 10 Australian Financial Services Licence ASIC must issue an AFSL for the relevant services unless applicant: Is not of good character or ASIC is of the view that they won't comply with obligations in s912A Licences issued are subject to conditions* which are customised to the licensees scope of authorisations *Additional optional reading: Corporations Regulations, r7.6.04; ASIC, Pro Forma 209: Australian financial services licence conditions 11 Australian Financial Services Licence obligations ( CA s912A) Licensee must: Ensure services are provided efficiently, honestly & fairly Have procedures to manage 'conflicts of interest' Interest of client inconsistent with interests of Licensee / Reps * *Source: ASIC RGPS [181.15] Licensing: Managing Conflicts of Interest 12 Australian Financial Services Licence obligations (s912A) Licensee must ensure that is complies with: licence conditions financial services laws & ensure that its Reps also comply Licensee must ensure: its Reps are adequately trained / competent to deliver financial service/financial product advice it has adequate resources it has procedures to manage risk and an appropriate compliance program in place be a member of an ASIC approved dispute resolution scheme - e.g. (www.fos.org.au) 13 Australian Financial Services Licence obligations (ss 912B-E) Have ASIC approved professional indemnity insurance (s912B) Notify ASIC of any breach of s912A/B Assist ASIC in checking its compliance with Act 14 ASIC comment 'The primary goals of the licensing regime and the general obligations... are to promote: (a)Consumer confidence in using financial services; and (b) The provision of efficient, honest and fair financial services by licensees and their representatives'. ASIC RG 104.11 15 Cancellation or suspension of AFSL ASIC can cancel or suspend an AFSL if Licensee is: Insolvent Convicted of serious fraud Has/will not comply with s912A obligations No longer of good character Banned or disqualified Licence application is found to be misleading 16 Banning orders A written order prohibiting provision of financial services: May apply to some or all services Only apply in specified circumstances Be permanent or for a specified period 17 Banning orders ASIC may issue if it: Suspends / cancels AFSL Licensee / Rep Insolvent Convicted of fraud Has / will not comply law ASIC keeps a public register of banned persons 18 ASIC comment* \"[W]e are likely to suspend or cancel ... an AFS license or ban a person where we have serious concerns about the person, or the way their business is being ... conducted. This is particularly so ... where there is a need to protect the public\"* * ASIC RG 98, Licensing: Administrative action against financial services providers 19 Other action ASIC may take Variation of AFSL conditions Enforceable undertakings If ASIC cancels AFSL / makes a permanent banning order it may apply for a court order disqualifying the person from providing financial services 20 Future of Financial Advice ('FOFA') reforms "We need to send a very clear message through our laws that Australians deserve firstclass financial advice. Advice which isn't tainted by commissions or kickbacks, advice which is clearly in their best interests and nobody else's\". Minister for Financial Services Chris Bowen (26/4/10) 21 FOFA reforms ASIC can now refuse to issue / cancel/suspend a licence where Licensee is likely to contravene their obligations No need to show will contravene or have contravened ban individuals from providing financial services if likely to contravene a financial services law; not of good character not adequately trained / competent 22 Restrictions on use of terminology Offence for Licensees / Authorised Reps to call selves 'independent' if they receive: Commissions Entry & trailing commissions (unless rebated to client) Volume bonuses Other benefits* from issuers of products which might influence advice * These non-monetary benefits are often called 'soft dollar' benefits. Additional optional reading: Disclosure of soft dollar benefits: An ASIC research report 23 FOFA reforms - ban on conflicted remuneration Licensees / Authorised Reps can't receive $/ benefits that could reasonably be expected to influence financial product advice / recommendations given to retail clients. Ban applies to both personal & general advice. Ban doesn't apply to arrangements entered into pre-July 1 2013. * Mandatory from July 1 2013. Additional optional reading at http://futureofadvice.treasury.gov.au/content/Content.aspx?doc=faq_adviser.htm 24 FOFA reforms - ban on conflicted remuneration Exceptions Monetary Advice re some types of financial product Execution only services Soft-dollar A benefit for a genuine education and training purpose Information technology support or software that relates to the provision of financial product advice A benefit below $300 (per adviser) which isn't given regularly 25 Unlicensed financial services providers A person who enters into an agreement with an unlicensed FSP can: Rescind (end) agreement Get refund of any commission paid 26