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Chapter 2 - Background to the Draft Bill
2.1
The draft Financial
Services Reform Bill is the culmination of an extensive reform program
of the regulatory requirements applying to the financial services industry. It
is the sixth stage of the Corporate Law Economic Reform Program announced by
the Treasurer in March 1997 as a fundamental review of key areas of regulation
which affect business and investment activity.
2.2
Developments in the
global and Australian business environment have made imperative the reform and
streamlining of Australia’s corporate law. Developing a regulatory framework
which responds to the demands of contemporary business is a major contribution
to achieving Australia’s economic goals.
2.3
The reform program has
been developed with the benefit of consultation with the business community and
the Business Regulation Advisory Group. The objective of the program has been
to promote business and market activity leading to important economic outcomes
including increased employment by enhancing market efficiency and integrity and
investor confidence.
2.4
The reform agenda has
been based on the key principles of market freedom, investor protection,
information transparency, cost effectiveness, regulatory neutrality and
flexibility, and business ethics and compliance.
2.5
The draft Bill is the
legislative outcome of a number of recommendations of the Financial System
Inquiry (FSI). The FSI proposed that there be a single licensing regime for
financial sales, advice and dealings in relation to financial products;
consistent and comparable financial product disclosure; and a single
authorisation procedure for financial exchanges and clearing and settlement
facilities.
2.6
The aim of the regime
is to achieve a competitively neutral regulatory framework which provides more
uniform regulation, thus reducing compliance and administrative costs and
removing unnecessary distinction between products. Further, consumers will
enjoy a more consistent system of consumer protection.
2.7
The position paper – Financial
Markets and Investment Products – released in December 1977 was followed by
a consultation paper, titled Financial Products, Service Providers and
Markets – An Integrated Framework in March 1999. An extensive consultation
process provided valuable feedback on the reform proposals which resulted in
the release in February 2000 of the draft Financial Services Reform Bill
together with the Commentary on the draft provisions.
2.8
The draft Bill proposes
a regulatory framework for the financial services industry that facilitates innovation
and promotes business, while at the same time ensuring adequate levels of
consumer protection and market integrity.
2.9
The draft Bill covers a
wide range of financial products including securities, derivatives, general and
life insurance, superannuation, deposit accounts and non-cash payments. The
regime will apply to the activities of existing financial intermediaries such
as insurance agents and brokers, securities advisers and dealers, and futures
brokers, as well as any other person carrying on a financial services business.
2.10
The flexible and
adaptable framework proposed will encourage innovation and competition in
markets and clearing and settlement facilities.
2.11
The reforms will play a
significant role in the Government’s push to make Australia a global financial
centre.
Outline of the Bill
Objects of Chapter 7 of the Corporations Law
2.12
The draft Bill proposes
to replace Chapters 7 and 8 of the Corporations Law with a new Chapter 7. The
objects of the new Chapter are given as promoting:
- confident and informed decision
making by consumers of financial products and services while facilitating
efficiency, flexibility and innovation in the provision of those products and
services;
- fairness, honesty and
professionalism by those who provide financial services;
- fair, orderly and transparent
markets for financial products; and
- the reduction of systemic risk and
the provision of fair and effective services by clearing and settlement
facilities.
2.13
These objects are to be
attained by the draft Bill’s key proposals:
- providing comparable regulation of
all financial products, including securities, derivatives, superannuation, life
and general insurance and bank-deposit products;
- licensing financial markets and
providing consistent and comparable regulation for similar financial products;
- licensing all financial advisers
and dealers and imposing statutory obligations on these intermediaries which
are designed to protect retail investors, and
- ensuring that ‘promoters’ or
issuers of financial products provide comprehensible disclosure documents that
assist investors to compare different investment products and to make informed
decisions.
2.14
The draft Bill seeks to
harmonise the existing diverse regulatory arrangements for financial markets
and investment products. Difficulties with the current regulatory framework
include the lack of consistent regulation of similar services and products and
overlapping regulatory regimes which impose unnecessary administrative costs on
regulators and compliance costs on participants.
2.15
Throughout the draft
Bill criteria to be satisfied (for example, to obtain a licence) are broadly
stated and flexible to accommodate different market structures, investment
products and financial intermediary services.
Key definitions
2.16
Part 7.1 contains the
key definitions applicable to proposed new Chapter 7 of the Corporations Law.
They will replace some of the existing definitions in the Corporations Law and
are drafted so that they are capable of application to the full range of
financial products that are to come within the Chapter. For example, the
concept of ‘able to be traded’ will replace the term ‘admitted to quotation’ in
relation to Chapter 7 to reflect the fact that the provisions will apply to all
financial products markets and not just those in relation to securities.
Similarly, the concepts of ‘acquire’ and ‘dispose’ have been defined broadly to
capture the wide range of products that are subject to the Chapter.
2.17
The draft Bill draws a
distinction between retail clients and wholesale clients. Retail clients
benefit from additional protection in the form of:
- the Financial Services Guide;
- the Statement of Advice;
- product disclosure documents; and
- compensation and complaint
handling arrangements.
2.18
The definition seeks to
accommodate the range of products and services that come within the regime. The
draft Bill distinguishes between general insurance products and other kinds of
financial products. The test for ‘retail client’ is different for these two
categories of financial products.
Definition of Financial Product
2.19
The draft Bill begins
with a broad general definition of financial product which focuses on the key
functions performed by financial products. This general definition is then
clarified or added to by a list of specific inclusions and a regulation-making
power to include further products. The scope of both the general definition and
the specific inclusions is then narrowed by a list of specific exclusions, a
regulation-making power to exclude products and an ASIC exemption power.
2.20
The general definition
focuses on three key functions that financial products provide:
- making a financial investment;
- managing a financial risk; and
- making non-cash payments.
Licensing of financial products markets
2.21
The purpose of Part 7.2
of the draft Bill is to create a single licensing scheme for securities and
futures exchanges in a more flexible regulatory framework than the current
seven fold licensing arrangements.
2.22
The draft Bill covers
the different responsibilities allocated to the Minister, ASIC and market licensees
in carrying out their respective functions in monitoring and promoting market
integrity and consumer protection.
Licensing of clearing and settlement
facilities
2.23
Clearing and settlement
facilities are the subject of Part 7.3 of the draft Bill. The purpose of Part
7.3 is to provide a more flexible and comprehensive regime for the regulation
of clearing and settlement facilities. Instead of the two routes to
authorisation provided in the current Corporations Law, there will be one.
2.24
The draft Bill permits access
to the relevant transfer provisions by a wider range of facilities. The
proposed provisions will permit (but not require) more than one clearing and
settlement facility to handle the clearing and settlement of transactions
executed on the one financial product market.
2.25
The draft Bill does not
increase the regulatory burden on those clearing and settlement facilities
currently regulated under the Corporations Law. Rather than imposing additional
obligations, some of the new provisions reflect aspects of the new, more
complete framework (for example, suspension of a licence) which are not
addressed in the current Law.
Compensation arrangements
2.26
The National Guarantee
Fund (NGF) and its administration are addressed in Part 7.4. In addition,
requirements are prescribed for compensation arrangements to cover a retail
client for specified losses of property entrusted to a participant in a
financial products market or clearing and settlement facility, where the NGF
does not apply.
Licensing of providers of financial services
2.27
Part 7.5 sets out when
an Australian Financial Services License is required, who may apply for a
licence and when a financial service is provided. It provides that:
-
persons seeking to carry on a
financial services business will need to obtain an Australian Financial
Services Licence;
- financial services are providing
advice, dealing in, or making a market in financial products; operating a
managed investment scheme; or providing a custodial or depository service;
- a licence will be required where
services are provided to either wholesale or retail clients. Additional
obligations will be placed on licensees who offer services to retail clients;
- licences may cover all financial
services in relation to all financial products or a subset of services and
products;
- transitional licensing
arrangements will apply to persons who are currently registered or licensed
under banking, insurance, superannuation or Corporations Law regimes;
- licensees may authorise natural
persons or corporate representatives to act on their behalf;
- authorised representatives will be
able to act for more than one licensee with the written consent of each
licensee (cross endorsement).
Disclosure and other conduct requirements
for licensees
2.28
Parts 7.6 and 7.7
prescribe the disclosure regime for financial services licensees and regulate
the way they deal with their clients’ moneys.
2.29
The disclosure regime
encompasses a number of elements.
-
Disclosure obligations will apply
to financial service providers who provide services to retail clients.
- Financial service providers must
give their retail clients a Financial Services Guide.
- Where personal advice is provided
to a retail client that advice must have a reasonable basis. The provider must
investigate the subject matter of the advice having regard to the client’s
objectives, financial situation and needs, and must base the advice on that
investigation.
- The provider must give the client
a Statement of Advice including the basis on which the advice was given and
information about any conflicts of interest (including commissions, fee, or
benefits) that the provider may have in giving the advice.
- The level of analysis undertaken
and the issues that should be considered by the provider will vary depending on
the complexity of the advice sought.
- Additional information must be
included where the advice is to replace an existing financial product. This
information must address the potential loss of any benefits and the costs
associated with replacing the financial product.
- The client must be warned if the
advice is based on information that is incomplete or inaccurate.
- Warnings must be provided to
retail clients where general advice is provided.
2.30
Part 7.7 provides that
licensees will be required:
- to establish and maintain a
separate account in which to hold client (both retail and wholesale) funds;
- where they hold funds or assets on
behalf of clients, to provide periodic statements to clients;
-
to keep financial records that
correctly record and explain the transactions and the financial position of the
financial services business carried on by the licensee;
- to prepare profit and loss
statements and balance sheets and lodge them together with an auditor’s report
with ASIC;
- to give priority to clients’
orders; and
-
to disclose and obtain client
consent when they will be acting on their own behalf in a transaction with a
non-licensee.
Financial product disclosure
2.31
Financial product
disclosure requirements and other requirements relating to the issue and sale
of financial products form the subject matter of Part 7.8. This disclosure
regime will replace a range of existing disclosure regimes for financial
products, some legislative and some self-regulatory. The draft Bill provides
for:
- point of sale disclosure through
the giving of a Product Disclosure Statement (PDS);
- other disclosure obligations in
relation to financial products encompassing:
- ongoing disclosures; and
- periodic reporting requirements;
- other obligations for transactions
in relation to financial products covering:
- handling money from applicants for
financial products;
- confirmation of transactions in
relation to financial products; and
- alternative dispute resolution
mechanisms for product issuers;
- obligations with respect to
advertising in relation to financial product;
- cooling-off periods for certain
financial products.
2.32
Part 7.8 will not
replace the disclosure requirements for shares and debentures under the
Corporations Law. However, some amendments will be necessary to the
Corporations Law to take account of the new disclosure regime.
Title to securities and other matters
2.33
Parts 7.9 and 7.10
conclude the draft Bill, dealing with matters relating to title to, and
transfer of, certain securities and other financial products. Qualified
privilege, the role of codes of conduct and the Minister’s power to delegate
are also covered.
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