As the selling season for investments in agricultural projects is underway, it is timely to remind you about compliance with the Corporations Act 2001 (the Act) requirements imposed on responsible entities when marketing and distributing projects.
Compliance Selling Tips
Below are just some of the important aspects you must comply with when distributing and marketing your products:
- PS 146 Compliance
Ensure your representatives, including authorised representatives, who give advice to clients about your projects, act within the scope of their authorisations and have the appropriate qualifications and experience, such as PS 146 training. These requirements form an important part of the obligation of licensees to monitor, supervise and train their representatives.
- Know Your Product
Financial product advisers are familiar with the ‘know your client’ rule, whereby a licensee (or its representative) is only permitted to provide personal advice to a retail client after first determining the personal circumstances of the client and making reasonable enquiries in relation to those circumstances. The advising party must be satisfied that, given the client’s own circumstances, the advice will be appropriate.
However, it is equally important to ‘know your product’. Representatives must thoroughly understand the nature of your project on offer in order to make a reasonable recommendation about the project to clients. For example, representatives giving advice must understand how your project works, the fees and costs associated with it, and have read your product disclosure statement (PDS).
If you are an external representative marketing products promoted by other organisations, then you have a responsibility to analyse and research the product. For authorised representatives (both corporate and individual), this could mean going outside the PDS and compiling an independent due diligence file. For example, there is some opinion that in the recent Westpoint case, adviser groups will be liable for the advice given on Westpoint products even though those products were on the recommended list of the dealer group for whom the adviser was acting. Independent research on a product by authorised representatives will help to mitigate this liability risk.
- Marketing Material
Marketing material such as newsletters, brochures, flyers and other promotional tools must comply with the rules about knowing your product and, if personal advice is given, knowing your client. Licensees can do this by recognising the limitations of broad based marketing in the text of the promotional material. For example, invariably all marketing material should contain the general advice warning under the Act, e.g., state it does not address the needs of any particular investment and advice should be obtained by individuals before they make a decision to invest in your project, identify you as the product issuer and state where a copy of the PDS can be obtained. This will include references to the PDS being available on a website or contact and address details for the company. Depending on the advertising medium, there are some exemptions from citing the full general advice warning in every circumstance.
- Keeping Websites Up-To-Date
Ensure your website information is current, and that you review your websites on a regular basis. It is always disconcerting when reviewing the site of any supplier to read words like "Last updated: 15 February 2005". Therefore, licensees should ensure that if former disclosure documents are retained on the website, then it must be clear as to whether or not the offers to which those disclosure documents relate have been closed. For any closed offers, the website must state those disclosure documents are retained for information purposes only, or, better still, remove them from the site.
- Keeping Records
To reduce the risk of liability in the event a client alleges loss suffered from incorrect financial product advice, representatives must keep accurate and sufficient records about the advice given to clients, for the time required by the Act, i.e., generally seven years from the date the advice is provided. Examples of records to keep can include the following, depending on your specific licence authorisations:
- Information regarding the assessment of a client’s situation.
- Reasons why a particular investment is considered appropriate for a client. Include some key features of the investment and the reasons why they answer the client’s specific needs.
- Details of any oral recommendation made.
- A complaints register to monitor client complaints and their resolution.
- Faxed Application Forms
We are sometimes asked whether applications forms lodged by fax are acceptable. The short answer is, yes. However, the Act makes it incumbent on responsible entities to only issue units where the application for those units was made on an application form included in, or accompanied by, a valid PDS given to the prospective investor, or which was copied or directly derived by that investor from such a form. Accordingly, you need to be certain the faxed application form was ultimately taken or copied from your PDS by the person lodging the application.
Finally, given a lot of the hard work has been done to get the PDS into the market, it would be a shame to be undone by a technicality. In addition to the above compliance tips, remember the following items which are often overlooked:
- If your offer has a minimum subscription, it must be reached within four months of the date of the PDS (or three months if the PDS was required to be lodged with the Australian Securities & Investments Commission). Diarise a few weeks before that date in case your subscriptions are not close enough and you need to take some action.
- All application money must be banked into a trust account on the day it is received, or on the next business day.
- Invariably, issues of project units must be confirmed in the manner and by the time prescribed by the Act under the confirming transactions provisions.
Licensees are strictly liable for all financial services provided by their representatives and authorised representatives. Therefore it is in your own interests as a product issuer to ensure your representatives comply with all requirements of the Act and your Australian financial services licence when selling your financial products.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.