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FINS3637: Wealth Management Advice
Lecture Two
Financial Services Regulations
Chapter 7 of the Corporations Act
FINS5537: Financial Planning Advice & Ethics
Lecture Two
Financial Services Regulations
Chapter 7 of the Corporations Act
References and Readings
• RG36
• RG175
• Thomson Financial Planning Handbook
• Corporations Act (Chapter 7)
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Financial Services Regulation Introduction
• Background
• Financial services inquiry (The Wallis Inquiry -1996)
• Recommendations – two regulators
1. Regulator responsible for prudential regulation of any entity that needed to be prudentially
regulated;
2. Regulator responsible for market and disclosure regulation of any financial products being
offered to Australian consumers.
• The Reserve Bank of Australia (RBA) retained its central banking functions
(banker for the banks), including responsibility for setting monetary policy and
most payment systems
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Two Key Regulators
• Australian Prudential Regulatory Authority – APRA
• Prudential regulator
• monitors ADIs, Insurers, Credit Unions, Superannuation Trustees (administering the SIS Act).
• Sets standards for solvency and investments
• Australian Securities Investment Commission – ASIC
• licensing regulator
• monitors supply of financial services and disclosure to retail consumers, applies licence standards in Corporations Act
• supervises conduct for monies paid for financial products and services
• supervises disclosure conduct for services
• consumer protection role
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Role of APRA
• APRA’s responsibilities:
• The authorisation and the ongoing prudential supervision
• The Administration of the following legislations
• Banking Act, 1959
• Insurance Act, 1973
• Life Insurance Act, 1995
• Superannuation Industry (Supervision) Act 1993
• APRA has power to issue Prudential Standards (as supplement to the
legislation)
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Role of ASIC
• Company Regulator:
• Formation and running of companies (i.e. company registration, liquidation, etc)
• Consumer Credit Regulator:
• License and regulate people and businesses engaged in consumer credit activities (including banks, credit unions, finance
companies, and mortgage and finance brokers) - National Consumer Credit Protection Act 2009.
• Markets Regulator:
• Assesses how effectively authorised financial markets are complying with their legal obligations to operate fair, orderly and
transparent markets with responsibility for the supervision of trading on Australia’s domestic licensed equity, derivatives and
futures markets.
• Financial Services Regulator (Role of ASIC in the financial advice space):
• Licenses and monitors financial services businesses to ensure that they operate efficiently, honestly and fairly.
• Other - registration of SMSF Auditors & insolvency practitioners
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ASIC
• ASIC administers the following legislation (or
relevant parts of) :
• Corporations Act 2001
• Australian Securities and Investments Commission Act 2001
• Insurance Contracts Act 1984
• Superannuation (Resolution of Complaints) Act 1993
• Superannuation Industry (Supervision) Act 1993
• Retirement Savings Accounts Act 1997
• Life Insurance Act 1995
• National Consumer Credit Protection Act 2009
• Medical Indemnity (Prudential Supervision and Product Standards) Act
2003.
• ASIC also administer the relevant regulations made under the above
legislations
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Financial Services Reforms
• Uniform Regulatory Framework
• Financial Services Reform Act 2001 - Enacted in 2002
• Inserting Chapter 7 into the Corporations Act 2001
• New regulatory framework governing licensing, conduct and disclosure of providers of
financial services commenced 2004
• In addition to the Corporations Act and Regulations there are also ASIC Guides and Policy
Papers
• Important Class Orders grant relief
• Gives ASIC the power to issue Class Orders (enforceable standards)
• Pros and cons of class order as compared to legislations
• Refinement to Financial Services Regulations in May 2005 - effective Dec 2005
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Financial Services Reforms – Recent Reforms
(Discussed next lecture)
• The Federal Parliamentary Joint Committee on Corporations and Financial
Services→ Chaired by Mr Bernie Ripoll→ The Ripoll Inquiry and Report
• The Future of Financial Advice - FOFA Tranche 1 & 2
– Voluntary compliance→ 1 July 2012
– Mandatory compliance→ 1 July 2013
• The Financial Services Enquiry
• Corporations Amendment (Professional Standards of Financial Advisers) Bill 2016
• FASEA → establishment and wind up
• The Quality of Advice Review (QAR) → Final report Recommendations
• Impact on Chapter 7 if the recommendations were to be accepted and legislated in full or in part.
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Recent Reforms and Developments
(Discussed next lecture)
• Limited licensing framework – Limited AFSL
• Tax Agent Services Act - TASA and Financial Product adviser
• From 1 July 2014 with a 3 year transition period
• SMSF Auditors Registration
• ASIC Regulatory Guide 243
• http://asic.gov.au/asic/pdflib.nsf/LookupByFileName/rg243-published-24-January-2013.pdf/$file/rg243-published-24-January-2013.pdf
• ASIC - Guidance→ Regulatory Guides
• Facilitative approach
• Review of External Dispute Resolution (EDR) and establishment of AFCA
• One stop shop for dispute resolution
• LIFE INSURANCE REMUNERATION REFORM REGULATIONS
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Financial Services Royal commission (FSRC)
• Commissioner Haynes’s work made four key observations
• The link between conduct and reward “Pursuit of gain/profit”
• Information asymmetry “imbalance of power and knowledge and knowledge between those
providing the product or service and those acquiring it”.
• Conflict of interest in many cases, the intermediary is paid by, and may act in the interests of,
the provider of the service or product. Or, if the intermediary does not act for the provider,
the intermediary may act only in the interests of the intermediary.”
• Holding financial services entities into account “financial services entities that broke the law
were not properly held to account. Misconduct will be deterred only if entities believe that
misconduct will be detected, denounced and justly punished”
• Recommendations
• Banking, financial advice, superannuation, Insurance, Culture governance and remuneration,
regulators, other important steps. (Covered next lecture)
FSRC Recommendations- Financial Advice
• Ongoing fee arrangements
• Recommendation 2.1 – Annual renewal and payment
• Lack of independence
• Recommendation 2.2 – Disclosure of lack of independence
• Quality of advice
• Recommendation 2.3 – Review of measures to improve the quality of advice
• Conflicted remuneration
• Recommendation 2.4 – Grandfathered commissions
• Recommendation 2.5 – Life risk insurance commissions
• Recommendation 2.6 – General insurance and consumer credit insurance
commissions
FSRC Recommendations- Financial Advice
• Professional discipline of financial advisers
• Recommendation 2.7 – Reference checking and information sharing
• Recommendation 2.8 – Reporting compliance concerns
• Recommendation 2.9 – Misconduct by financial advisers
• Recommendation 2.10 – A new disciplinary system
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Financial Services regulations (Chapter 7)
Background - Financial planning
• The process a financial planner follows to understand each client’s different
needs and financial objectives and to recommend an appropriate strategy.
• The financial planning process:
• 1. Gather financial information about the client
• 2. Identify financial and lifestyle goals
• 3. Identify any financial issues
• 4. Prepare a financial plan
• 5. Implement the plan
• 6. Review and revise the plan at regular intervals, or when circumstances change.
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Provision of Financial Services
• A person provides a financial service if they:
• (a) provide financial product advice;
• (b) deal in a financial product;
• (c) make a market for a financial product;
• (d) operate a registered scheme;
• (e) provide a custodial or depository service;
• (f) provide traditional trustee company services; or
• (g) engage in conduct of a kind prescribed in the Corporations Regulations 2001
(Corporations Regulations) (s766A )of the Corporations Act 2001 (Corporations Act).
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Provision of Financial Services
• A person must only provide financial services on behalf of another person
who carries on a financial services business if:
• The provider is the employee or director of the licensee or a related body corporate
of the licensee i.e. a representative
• The provider is an authorised representative of the licensee (i.e. Industry
terminology - part of a dealer group)
• The provider provides the service in their own right as an AFS licensee
• The provider is exempt
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Australian Financial Services Licence (AFSL)
• Single licensing framework
• Need to hold an AFSL if you carry on a financial services business in Australia (i.e. satisfy the
business test)
• unless an exemption in s911A(2) applies (i.e. Authorised Representatives s911A(2)(a))
• If you provide financial services as a representative of a licensee, you may need to hold an authorisation from that licensee.
• Licensees must comply with various licensee obligations, including
• s912A -General Obligations, and
• 912B Compensation arrangements if financial services provided to a retail client.
• While the primary obligation to ensure compliance with the financial services laws is imposed on
licensees, some obligations in the law apply directly to representatives.
• i.e. disclosure obligation, Best interest Duty, hawking prohibition, etc.
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Licensee Obligations
CORPORATIONS ACT 2001 - SECT 912A
General obligations
(1) A financial services licensee must:
(a) do all things necessary to ensure that the financial services covered by the licence are provided efficiently, honestly and fairly; and
(aa) have in place adequate arrangements for the management of conflicts of interest that may arise wholly, or partially, in relation to activities
undertaken by the licensee or a representative of the licensee in the provision of financial services as part of the financial services business of the
licensee or the representative; and
(b) comply with the conditions on the licence; and
(c) comply with the financial services laws; and
(ca) take reasonable steps to ensure that its representatives comply with the financial services laws; and
(d)unless the licensee is a body regulated by APRA--have available adequate resources (including financial, technological and human resources) to
provide the financial services covered by the licence and to carry out supervisory arrangements; and
(e) maintain the competence to provide those financial services; and
(f) ensure that its representatives are adequately trained, and are competent, to provide those financial services; and
(g) if those financial services are provided to persons as retail clients--have a dispute resolution system complying with subsection (2); and
(h) unless the licensee is a body regulated by APRA--have adequate risk management systems; and
(j) comply with any other obligations that are prescribed by regulations made for the purposes of this paragraph.