On 24 May 2007, the Corporations Legislation Amendment (Simpler Regulatory System) Bill 2007 was presented to Parliament for its Second Reading speech. The Bill is intended to simplify aspects of the current regulatory system but it is of note that the Bill itself exceeds 70 pages and the Explanatory Memorandum exceeds 180 pages.
The reforms follow the recommendations in the ‘Rethinking Regulation’ report of the Banks Taskforce on Reducing the Regulatory Burden on Business and the release of the Corporate and Financial Services Regulation Review Proposals Paper in November 2006. However, not all of the proposals have been incorporated in this round of reforms.
This update addresses the reforms specific to Chapter 7 of the Corporations Act 2001 (Cth). It should be noted that there are reforms to other chapters of the Act which impact on financial services. The reforms to Chapter 5 Fundraising Activities are addressed in a separate update.
The provision of financial advice
The definition of advice in Section 766B has caused considerable debate since its introduction in 2002. In particular, the broad definition of general and personal advice has been the subject of intense debate. This round of reforms do not adopt the proposal to distinguish pure sales activity from financial advice. Lack of agreement in relation to how this should be defined has caused the Government to seek further consultation with stakeholders.
Record of Advice - small investments
It has been estimated that approximately 720,000 Statements of Advice are issued each year at an average preparation cost to advisors of $260 for each advice. The reforms attempt to balance the needs of consumers and the burden of the compliance costs associated with the FSR disclosure requirements by introducing Section 946AA. Providing entities will no longer be required to provide a Statement of Advice (SOA) where the total value of all investments in relation to which advice is provided is below the prescribed threshold amount. This Section will not apply to advice in relation to derivatives, general insurance, life risk products or any superannuation product (other than one in which the client already has an interest).
The threshold (which has been prescribed at $15,000) will apply to advice related to acquisitions as well as disposals. The method for calculating the threshold amount for particular kinds of financial products will be a matter for regulation.
If a SOA is no longer required because of the application of the threshold, the providing entity will now have to keep a Record of Advice (ROA), a copy of which must be given to the client together with disclosure of remuneration and other interests required to be disclosed in a SOA. This reform, while intended to reduce the burden on advisors, will require certain enquiries to be made as well as a determination of the client’s status before a decision can be made as to whether or not a SOA or a ROA will be required.
It is intended that the ROA be a more concise document than the SOA. The Second Reading Speech emphasises that there will still be a requirement that the advice provided will be reasonable having regard to the client’s circumstances.
The SOA exemption given to general insurance products (other than sickness and accident and consumer credit) will remain.
What has been left unanswered by the reforms is which disclosure requirement will apply when a person who initially receives a ROA requires additional advice and the value of their financial product has increased over the threshold amount. Whether this will trigger the requirement to give a SOA or whether qualification to receive a ROA applies during the entire relationship is not yet clear.
Personal advice - no product recommendation and no remuneration
The Government has responded to concerns that a client seeking a minor piece of personal advice requires the advisor to produce a new SOA. In order to reduce the cost of such advice the reforms introduce new Section 946B(7) which will permit the use of a ROA in certain no recommendation - no remuneration situations. However, when giving the advice referred to in Section 946B(7) the client must still be provided with disclosure of remuneration and other interests required by Section 947(2)(d) and (e) or Section 947C(3)(e)(f).
Consequential amendments are being made to clarify the definition of defective disclosure statements to reflect the introduction of the ROA and to set out how documents, information and statements are to be given.
PDS in use notice and online reporting requirements
In 2005, ASIC received 12,000 PDS in use notices which were of limited regulatory use because the data provided did not assist ASIC to determine whether or not the information contained in the PDS was out of date or the product withdrawn from the market. Product issuers will be required to lodge an online report notifying ASIC when the PDS is first in use. There will be additional notification triggers imposed on issuers requiring the electronic lodgement of information when a PDS is out of use or when changes have been made to the fees or charges in the enhanced fee disclosure table. A fee will only be charged on the filing of the in use notice.
Despite industry lobbying for a change to the five day reporting requirement, the reporting period remains unchanged.
The modification to require electronic lodgement is scheduled for a delayed commencement on 1 January 2009. No mention is made in the reforms of the date for the introduction of the additional reporting requirements. These are likely to be introduced by Regulation.
Non cash payment facilities
The Government has announced that disclosure requirements for non cash payment facilities that are not related to basic deposit products will be streamlined. These changes are not in the reforms and are to be introduced by Regulation.
Cross endorsement of authorised representatives
Amendments to Division 6 of Part 7.6 will the have the effect of amending the cross endorsement provisions in that licensees will only be jointly and severally liable for the conduct of their authorised representatives when the representatives provide financial services in relation to financial products that are of the same sub-class of financial product. This reform will be supported by changes to the Regulations and until these are released it will not be known which financial products this reform will apply to.
The definition of retail client contains a number of tests to determine whether a client is a retail or wholesale client. The reforms recognise that there are some investors who by experience or training prefer to have the status of a wholesale investor. Section 708(10) already provides a mechanism which allows experienced investors to be certified as a wholesale client but this is restricted in its application to securities. This reform brings the provisions of Chapter 7 in line with the provisions of Chapter 6D by inserting a new test (Section 761GA) to allow the licensee to determine whether the client has the required experience and expertise and to then obtain a written acknowledgement from the client to the effect that a PDS has not been provided and that the licensee has no obligation to treat the client as a retail client.
How this reform will work in practice across a range of financial products more complex than shares will be of interest, especially if the client’s perception of their expertise and experience is at odds with that of the licensee. The onus will be on the licensee to make a determination of the client’s status before or at the time of the provision of the product or the advice.
Many of the financial services related reforms introduce new triggers, forms or new tests into the relationship between the licensee and the client or the license and ASIC. It is unclear whether these reforms will in practice simplify compliance and reduce cost or whether they have added to the compliance requirements.
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