How To Improve The Financial Services Guide

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EFINEMENTS TO

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INANCIAL

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ERVICES

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EGULATION

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APER

© Commonwealth of Australia 2005 ISBN 0 642 74287 1

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C

ONSULTATION

The Government would like to consult with industry and consumer representatives on the proposed refinements put forward in this paper, prior to preparing the necessary changes.

While written comments on the paper are welcomed, it is envisaged that the primary means of consulting will be through meetings between the Government (represented by the Treasury and, where appropriate, the Parliamentary Secretary to the Treasurer) and industry and consumer representatives.

Anyone who is either not a member of a representative body, or who would like to be separately represented at a consultation meeting, should contact the Treasury — see details below. While every effort will be made to accommodate requests for individual representation, it may not be possible in all cases, in order to ensure that the consultation process remains manageable.

Written comments on the proposals presented in this paper may be submitted by mail, fax or e-mail to:

FSR Refinements Project

Corporations and Financial Services Division

The Treasury

Langton Crescent PARKES ACT 2600 Fax: 02 6263 2770

[email protected]

and should be received by 3 June 2005. The Government is looking to introduce any refinements to financial services regulation as soon as practicable.

Inquiries about this paper or the further consultation process may be directed to:

Manager — Investor Protection Unit

Corporations and Financial Services Division

The Treasury

Consultation

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It will be assumed that submissions are not confidential and may be made publicly available. If you would like your submission, or any part of it, to be treated as ‘confidential’, please indicate this clearly. A request made under the Freedom of Information Act 1982 (Cth) for a submission marked confidential to be made available will be determined in accordance with that Act.

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OREWORD

I am pleased to release this paper proposing refinements to aspects of financial services regulation introduced by the Financial Services Reform Act 2001 (FSR Act), now contained in Chapter 7 of the Corporations Act 2001. The reforms introduced by the FSR Act have comprehensively rationalised Australia’s financial services and markets sectors.

The introduction of financial services licensing has produced significant benefits for consumers through the promotion of consistent basic standards across the financial services industry. Training requirements mean that staff are able to respond more knowledgably to consumer needs, producing better outcomes for all participants in a transaction. Disclosure documents with standard content help consumers to compare ‘apples with apples’ — to analyse and understand competing products and services.

I have considered the question of whether the reforms to financial services regulation have achieved the objectives that were set out for them. Overall, the response from the community is a firm ‘yes’. Nevertheless, in light of various stakeholders’ day-to-day experience with financial services regulation, it has become clear that parts of the regime need refinement.

In embarking on this refinement process, I intend to:

• ensure that consumers receive information that is relevant to their needs; • reduce the compliance burden on industry; and

• clarify the intent of the legislative and regulatory framework that applies to

the financial services industry.

Without diminishing the importance of the other proposals being put forward in this document, the most important area of concern to me is in the area of disclosure. It is important for the Australian Government and the Australian Securities and Investments Commission to work with industry to equip consumers with the information needed to make informed financial decisions.

Foreword

I believe that these proposals will refine the legislation so that it meets the expectations of the Australian community.

The Hon Chris Pearce MP

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ONTENTS

CONSULTATION...iii

FOREWORD...v

CONTENTS...vii

PROPOSED REFINEMENTS IN SUMMARY...ix

REFINING THE REFORMS...1

Regulation of financial services ... 1

Need for refinement ... 1

ASIC’s role ... 2

REFINEMENT PROPOSALS...3

Disclosure... 3

1. Financial Services Guide ... 3

2. Statement of Advice... 5

3. Product Disclosure Statement ... 9

4. Oral Disclosure ... 12

5. General Advice Warning ... 13

6. Basic Deposit Products... 15

7. General Insurance Products ... 16

Further issues ... 19

8. Retail/Wholesale Client Distinction ... 19

9. Secondary Services ‘look through’ ... 21

10. General Advice Definition ... 24

11. Jurisdictional Reach... 26

12. Authorised Representatives... 28

13. Staff Training... 29

P

ROPOSED

R

EFINEMENTS IN

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UMMARY

ISSUES PROPOSED REFINEMENTS

1. Financial Services Guide The information required in a Financial

Services Guide is too broad. 1.1. Clarify by regulation that licensees may tailor their Financial Services Guides to specific financial services or products. Some information required to be included

in a Financial Services Guide is duplicated in a Product Disclosure Statement.

1.2. Where a licensee or authorised

representative sells or arranges to sell a financial product, specify by regulation that the relevant Financial Services Guide need not include information which will be provided in the Product Disclosure Statement.

Some information required to be included in a Financial Services Guide is too detailed and overlaps with that provided in a Statement of Advice.

1.3. Specify by regulation that where a licensee is authorised to provide personal advice, the Financial Services Guide need only contain brief, generic information about

remuneration and conflicts of interest concerning the provision of the personal advice.

2. Statement of Advice

Some Statements of Advice provided in ongoing relationships between clients and providers of personal advice are

unnecessary.

2.1. Amend regulations to exempt advice providers from the requirement to provide a Statement of Advice for information subsequent to the initial Statement of Advice, where:

• there is an ongoing relationship between a retail client and a provider; and

• there are no significant changes in the client’s personal circumstances or the basis of the advice since the last Statement of Advice was given. The provider would instead be required to keep a record of the subsequent advice for seven years and provide it to the client, if requested.

Proposed refinements in summary

ISSUES PROPOSED REFINEMENTS

2. Statement of Advice (continued) Information required to be included in Statements of Advice is considered to be too lengthy and complex.

2.2. Amend the regulations to clarify that advisers are not obliged to include in a Statement of Advice information on alternative products or strategies that are considered but that do not form part of the final recommendation given by the adviser. 3. Product Disclosure Statement

The length and complexity of the information contained in a Product Disclosure Statement is counterproductive to enabling consumers to understand and compare products.

3. Amend the regulations to allow issuers of financial products to provide a ‘short form’ Product Disclosure Statement that contains core information, with full product

information available on request or through an easily accessible forum, such as the internet.

4. Oral Disclosure

The product disclosure information that is required to be delivered orally is too lengthy and complicated to be delivered and understood over the telephone.

4. Specify by regulation that where a cooling-off period applies, oral disclosure can be reduced to referring to the availability of that cooling-off period and that a written Product Disclosure Statement will be provided.

5. General Advice Warning

General Advice Warnings are not always meaningful for consumers.

5.1. ASIC will provide further guidance to develop simple General Advice Warnings conveying the substance of the legislative requirements, instead of relying on the precise wording of the Corporations Act. ASIC will also use its powers to provide relief, where appropriate.

Proposed refinements in summary

ISSUES PROPOSED REFINEMENTS

5. General Advice Warning (continued) The General Advice Warning

requirements do not apply consistently to different kinds of advertisers.

5.2. In regards to advertising, ASIC will provide further guidance and/or relief to promote consistent and simple compliance with the General Advice Warning requirements by unlicensed and licensed product issuers. 6. Basic Deposit Products

The detailed disclosure requirements are not appropriate for Basic Deposit Products as these products are generally low risk and well understood by consumers.

6. Exempt Basic Deposit Products from the Product Disclosure Statement requirements, by regulation, subject to appropriate oral disclosure and adequate and accessible disclosure of information on fees and charges on application, at point of sale and on a website.

7. General Insurance Products General insurance products are subject to additional specific disclosure requirements as insurance contracts, which add to the length of disclosure documents.

7.1. Through the regulations, tailor the Product Disclosure Statement requirements for general insurance so that an insurer need only disclose certain core information, including that required to comply with Insurance Contracts Act obligations.

Product Disclosure Statements are required on each renewal of an insurance product, even where there is no new product information to disclose.

7.2. Specify through the regulations that a general insurance Product Disclosure Statement does not need to be given on renewal, where no material changes to the policy have occurred (other than in relation to the amount of premium payable). 8. Retail/Wholesale Client Distinction

The tests to determine the status of a client may lead to inconsistent outcomes.

8.1. Amend the regulations to extend wholesale treatment to companies and trusts that are controlled by wholesale investors and related bodies corporate of wholesale corporations.

Proposed refinements in summary

ISSUES PROPOSED REFINEMENTS

8. Retail/Wholesale Client Distinction (continued) The tests to determine the status of a

client may not work appropriately.

8.2. Amend the regulations to simplify paragraph (e) of the definition of

professional investor to be a person with a minimum of $10 million in gross assets.

Accountants’ certificates are required to be renewed too frequently.

8.3. Amend the regulations to extend the six-month renewal period for accountants’ certificates to 24 months.

9. Secondary Services ‘look-through’ It is not necessary to apply the Financial Services Guide requirements to a secondary service provider where an intermediary is able to provide, and accepts responsibility for providing, the services of the secondary service provider.

9.1. Specify through regulations that a secondary service provider will be exempt from the Financial Services Guide requirements where the intermediary’s licence covers the same services as the secondary service provider and the intermediary accepts responsibility for the services provided by the secondary service provider.

It is not appropriate to require delivery of a secondary service provider’s Financial Services Guide where it is otherwise made available.

9.2. Specify through regulations that a

secondary service provider does not have to give its Financial Services Guide to a retail client where the intermediary informs the client how the secondary service provider’s Financial Services Guide is made available (including on request).

10. General Advice Definition The definition of financial product advice, and hence general advice, is too broad.

10.1. Specify through a regulation that financial product advice does not include general advice:

• from an unlicensed product issuer about its own products; or

• from anyone that is not linked to a specific product,

where no remuneration or other benefit is received.

Proposed refinements in summary

ISSUES PROPOSED REFINEMENTS

10. General Advice Definition (continued) The definition of personal advice may apply to some communications that should more appropriately be treated as general advice.

10.2. ASIC will provide guidance and/or relief to clarify that the mere possession (as opposed to consideration) of information about a client’s relevant personal

circumstances does not render advice given to that client personal advice.

The definition of personal advice may encompass online calculators that should more appropriately be treated as general advice.

10.3. ASIC will provide further guidance and/or relief on the provision of basic online calculators to promote their use.

11. Jurisdictional Reach

Uncertainty about the jurisdictional reach of the legislation in certain situations.

11. Specify in regulations the jurisdictional reach of the Australian financial services law so that an Australian Financial Services Licence is not required in certain defined situations.

12. Authorised Representatives Limitations on the ability to sub-authorise individuals as authorised representatives.

12.1. Specify in the regulations that an individual may be sub-authorised by an authorised representative structured as a partnership, trust or sole trader.

The requirement to authorise agents arranging for the issue of generally well-understood products such as general insurance.

12.2. ASIC will provide guidance on, and/or relief from, compliance with the authorisation requirements for agents where:

• they are arranging for the issue of general insurance products of an Australian general insurer; and

• the insurer accepts responsibility for the conduct of those agents.

Proposed refinements in summary

ISSUES PROPOSED REFINEMENTS

13. Staff Training

Difficulty for some licensees in training new staff while meeting customer service expectations.

13. ASIC will provide guidance on training requirements for individuals to facilitate wide access to services where advice is only provided on basic deposit products and related non-cash payment facilities. 14. Non-Cash Payment Facilities

Uncertainty as to whether loyalty

schemes, retailer gift vouchers and certain low-value non-cash payment facilities are intended to be regulated under the financial services regime.

14. ASIC will issue guidance and/or relief to exempt from the definition of a ‘non-cash payment facility’ products not intended to be covered.

R

EFINING

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HE

R

EFORMS

In preparing this paper, the Government considered the views of a broad cross-section of the community, including the Financial Sector Advisory Council. Particular consideration was paid to the question of whether the reforms to the regulation of financial services had achieved the Government’s objectives. Overall, the answer to this question is ‘yes’, however, there are some concerns about the operation of elements of the legislation in practice.

R

The Financial Services Reform Act 2001 (FSR Act) provided the legislative response to a number of recommendations of the Financial System Inquiry. In particular, the FSR Act introduced 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.

The previous regulation of providers of financial services was product-specific and contained in a number of different Acts and non-legislative instruments. The FSR Act removed unnecessary distinctions between financial products to rationalise compliance obligations and put in place a competitively neutral regulatory system. In addition, it aimed to give consumers a more consistent framework of consumer protection in which to make their financial decisions.

N

During the transition to the new requirements, the Government received considerable comment about the coverage of the licensing regime and the higher standards that it put in place. This was a natural reaction to bringing groups that were previously regulated under separate and different rules under a single framework. Such changes did require time, effort and expense in satisfying the new licensing arrangements and the Government recognises the significant effort of industry in making the adjustment.

The licensing arrangements are now working effectively and are generally accepted as the norm. As such, the Government is not proposing to change the coverage of the financial services licensing framework.

However, the Government recognises community concern about the amount and detail of information provided to consumers through financial services disclosure. The content requirements for the various disclosure documents are

Refining the reforms

resulting in excessively lengthy and complex documents (or, in the case of oral disclosure, excessively lengthy telephone ‘scripts’), which are difficult to reconcile with the legislation’s requirement that information be presented to consumers in a clear, concise and effective manner.

As a result, the purpose behind the disclosure requirements — that is, to assist consumers to make informed investment decisions — is possibly being undermined. In addition, the expense of producing lengthy disclosure documents is seen as an unreasonable burden on financial service providers and, in many instances, the increased cost is passed through to consumers. As this was not the intention of the legislation, the Government seeks to improve the written and oral disclosure requirements through this refinement process.

The Government also recognises that disclosure-related issues are not the only ones that it needs to consider. The community has also raised concern about other issues, including:

• retail/wholesale client distinction; • secondary services ‘look through’; • general advice definition;

• jurisdictional reach;

• authorised representatives; • staff training; and

• non-cash payment facilities.

ASIC’

This paper takes into account discussions with, and suggestions of, the regulator, the Australian Securities and Investments Commission (ASIC). As well as proposed changes to the regulations, this paper also includes some proposals identified by ASIC for future work.

R

EFINEMENT

P

ROPOSALS

D

The FSR Act applies consistent disclosure requirements to all financial products (other than shares and debentures), but retains the flexibility to cater for differences between products. The requirements comprise point-of-sale disclosure, ongoing disclosure and periodic reporting requirements, advertising requirements, and an obligation to provide confirmation of transactions.

This disclosure regime replaced a range of previous disclosure requirements for financial products, including those under the Superannuation Industry (Supervision) Act 1993 and regulations, the Retirement Savings Accounts Act 1997 and regulations, life insurance circulars, codes of practice governing deposit-taking institutions, and previous Corporations Act requirements for managed investments. The new regime also supplemented, but did not replace, requirements under the Insurance Contracts Act 1984.

1. F

S

G

The purpose of the Financial Services Guide (FSG) is to ensure that potential retail clients receive key information about the type of services being offered by a financial service provider. The FSG should enable the client to identify:

• who is offering the service — both the person with whom the client is

engaging and, where relevant, the licensee responsible for that person’s conduct;

• any associations the licensee and/or authorised representative may have

with a product issuer;

• the nature of the service(s) being offered; • fees and costs applying to the service(s); and

• avenues for redress if the services provided are not satisfactory (for

Refinement proposals

Tailoring Financial Services Guides

Community comment suggests that FSGs should be ‘tailored’. That is, rather than describing the full range of services/products offered by the licensee, FSGs should cover information about specific services/products or categories of services/products relevant to a particular consumer or class of consumers to whom the FSG will actually be provided.

Although some interpretations of the legislation would appear to permit tailoring of FSGs, the matter is not free from doubt. To resolve doubt, the law should be modified to specifically provide that FSGs can be tailored. This should assist in the production of shorter FSGs which can be more focused, and avoid irrelevant or unnecessary information being supplied to consumers.

Financial Services Guide

Issue The information required in a Financial Services Guide

is too broad.

Refinement Proposal 1.1 Clarify by regulation that licensees may tailor their Financial Services Guides to specific financial services or products.

Intended Outcome Facilitate the provision of more specific and concise information to consumers by encouraging the production of Financial Services Guides that are shorter and more directly relevant to consumer needs.

Duplication of information

Some of the information required for FSGs duplicates information contained in other disclosure documents (for example, information about dispute resolution mechanisms).

Some measures have already been taken to reduce duplication of information in disclosure documents. For example, section 942DA of the Corporations Act permits ‘combined’ FSGs and Product Disclosure Statements (PDSs). However, there is scope to reduce duplication further.

For instance, some licensees and authorised representatives may not be able to produce a combined FSG and PDS, or may consider the production of such a document impractical. Nevertheless, such persons may produce FSGs that duplicate some information in the PDSs that they regularly provide to clients. To allow greater flexibility in this area, regulations should specify that the FSG need not include information that is also disclosed in a relevant PDS, where it is likely that the potential client will also receive that PDS. Such flexibility

Refinement proposals

would complement the proposal to allow licensees to tailor FSGs to particular financial products.

Financial Services Guide

Issue Some information required to be included in a

Financial Services Guide is duplicated in a Product Disclosure Statement.

Refinement Proposal 1.2 Where a licensee or authorised representative sells or arranges to sell a financial product, specify by

regulation that the relevant Financial Services Guide need not include information which will be provided in the Product Disclosure Statement.

Intended Outcome Reduce duplication of information provided to

consumers in Product Disclosure Statements and encourage shorter Financial Services Guides.

The FSG also duplicates information in the Statement of Advice (SoA), in particular, details about remuneration and conflicts of interest. To reduce such duplication, the legislation could limit remuneration and conflicts of interest disclosure in FSGs to general descriptions where advice providers anticipate that they will later provide personal advice to a retail client. In such cases, the SoA would contain the detailed specific remuneration and conflicts of interest disclosures.

Financial Services Guide

Issue Some information required to be included in a

Financial Services Guide is too detailed and overlaps with that provided in a Statement of Advice.

Refinement Proposal 1.3 Specify by regulation that where a licensee is authorised to provide personal advice, the Financial Services Guide need only contain brief, generic

information about remuneration and conflicts of interest concerning the provision of the personal advice.

Intended Outcome Encourage shorter Financial Services Guides for

consumers by removing duplication of information provided in Statements of Advice.

2. S

A

The Statement of Advice (SoA) is required to be given to a retail client, where advice is provided in circumstances where the provider of the advice has considered one or more of the person’s objectives, financial situation and

Refinement proposals

needs, or a reasonable person might expect the provider to have considered one or more of those matters. This is ‘personal advice’ and is defined in subsection 766B(3) of the Corporations Act.

The SoA is required to include the advice itself, the basis on which it was given and information about any remuneration (including commissions) or associations which might reasonably be expected to be, or have been, capable of influencing the adviser in providing the advice. The Government has stated on many occasions that payments which might influence advice are an important piece of information which consumers should have, and that the requirement to disclose such payments will not be removed. The purpose of a SoA is to give the retail client information with which to judge the value and impartiality of the advice, prior to deciding whether to act on it.

Repetitious information in Statements of Advice

Concerns have been expressed about the repetition of information provided to clients where there is an ongoing relationship between a client and an adviser. In such circumstances, the requirement to prepare a ‘full’ SoA each time personal advice is given to a client is seen as an unnecessary burden by industry participants and of questionable value to clients.

There is scope to improve the workability of the SoA requirements to ensure that they meet their stated purpose, and do not simply become a risk management tool for advisers.

At present, the SoA requirements are predicated on the model of advice being given around a specific product sale. Greater flexibility is needed to adapt SoAs to investment strategies that are to be executed over time, and which may involve multiple but related instances of advice being provided during the course of executing the strategy.

Providing further advice

Currently, section 946B of the Corporations Act provides that a SoA does not have to be provided each time personal advice is given to a retail client, so long as:

• the client has received an ‘initial’ SoA; and

• any further advice given to the client is consistent with the advice in the

initial SoA; and

• the client’s relevant personal circumstances have not significantly changed

Refinement proposals

This arrangement applies in respect of what is known as further market-related advice (FMRA) and currently applies only to advice given by participants on a licensed market, and only in respect of financial products able to be traded on those licensed markets (and certain related cash management facilities). The rationale behind the FMRA arrangement is that in the environment of a ‘live’ financial market, where market prices (and hence opportunities to invest, or to realise an investment) move rapidly, it is not practical to require an adviser to prepare a written SoA each time advice is given to a client.

Record of advice

In situations where advice is not urgent, there is scope to allow the provider to produce a record of advice, instead of a SoA. The record of advice need only be provided at the client’s request, however, the provider would be required to keep the record of advice for seven years (as is the case for SoAs). This record of advice would contain information subsequent to that set out in the initial SoA, including the basis on which any recommendations to the client were made. This would be available to providers of personal advice, other than participants on licensed markets.

This approach goes beyond the relief that ASIC has been able to provide under Class Order 04/1556, which allows what is known as a Statement of Additional Advice to be provided where there is an ongoing relationship between an adviser and a retail client.

The result would be to reduce the volume of (often duplicated) information for personal advice that is provided in relation to financial products other than those traded on ‘live’ licensed financial markets, where there is an ongoing relationship between the client and the adviser, and where the client’s circumstances have not changed.

Refinement proposals

Statement of Advice

Issue Some Statements of Advice provided in ongoing

relationships between clients and providers of personal advice are unnecessary.

Refinement Proposal 2.1 Amend regulations to exempt advice providers from the requirement to provide a Statement of Advice for information subsequent to the initial Statement of Advice, where:

• there is an ongoing relationship between a retail client and a provider; and

• there are no significant changes in the client’s personal circumstances or the basis of the advice since the last Statement of Advice was given. The provider would instead be required to keep a record of the subsequent advice for seven years and provide it to the client, if requested.

Intended Outcome Ensure that Statements of Advice do not become

ignored by consumers as a result of repeating previously provided information.

Reducing length

There is scope to reduce the length of SoAs (regardless of whether there is an ongoing relationship with the client) by clarifying the requirement to provide ‘information about the basis on which the advice is or was given’ (in paragraphs 947B(2)(b) and 947C(2)(b) of the Corporations Act). Currently, this is generally understood to include a generic description of the financial products or strategies considered and investigated by the adviser, including those ultimately not recommended. The purpose of making a reference to all of the products or strategies considered is to ensure that the client is aware of the range of options considered by the adviser before making a decision whether to act on the recommendations contained in the advice.

While it is important that advisers explain the reasoning for their advice in the SoA, it may not always be of great value to a client for the SoA to include details of those financial products or investment strategies that were considered by the adviser, but rejected because they were not deemed suitable. However, consistent with good practice, it is expected that the adviser will keep a record containing brief details of the alternative products and strategies that were considered but not recommended.

Refinement proposals

The Government does not wish to impose a rigid template approach as SoAs are, by their nature, variable documents targeted to an individual client’s needs. However, there is a desire for greater guidance. To meet this need, ASIC has agreed to work with stakeholders to issue further guidance on compliance with the SoA and clear, concise and effective obligations, including the issue of a model SoA.

Statement of Advice

Issue Information required to be included in Statements of

Advice is considered to be too lengthy and complex.

Refinement Proposal 2.2 Amend the regulations to clarify that advisers are not obliged to include in a Statement of Advice information on alternative products or strategies that are

considered but that do not form part of the final recommendation given by the adviser.

Intended Outcome Avoid confusing consumers through description of

alternative products and strategies that are considered but discounted by an adviser.

3. P

D

S

The Product Disclosure Statement (PDS) is a point-of-sale disclosure document designed to provide consumers with sufficient information to make informed decisions in relation to the acquisition of financial products, including the ability to compare a range of products.

PDS requirements for basic deposit products and general insurance products are dealt with as separate items and are subject to their own proposals below.

Issues with Product Disclosure Statement requirements

The major criticism of the PDS requirements of the legislation is that they result in complex and lengthy documents (or lengthy oral disclosure).

Certain information is required to be included in a PDS (section 1013D of the Corporations Act), but only to the extent that the information is applicable to the financial product in question. The legislation also contains a general requirement (in section 1013E) that a PDS ‘must also contain any other information that might reasonably be expected to have a material influence on the decision of a … retail client, whether to acquire the product’. This general obligation is qualified by subsection 1013C(2) and section 1013F, which essentially provide that information that is not known to persons preparing or

Refinement proposals

responsible for the PDS, or information that a reasonable person would not expect to find in the PDS, does not need to be included.

Effective consumer information

There is evidence of a trend to shorter and less complex PDSs as industry gains experience with the legislation, with many product providers producing short, simple PDSs which highlight the key features of the product in an effective way. ASIC has assisted this trend by emphasising the importance of the ‘clear, concise and effective’ requirement of the legislation over formulaic material intended to safeguard against legal liability.

However, there is still concern that consumers receive too much information, which is counterproductive to improving their understanding of financial products. This results, at least in part, from some product providers viewing the PDS as a risk management tool, rather than a means to inform consumers. ASIC will continue to promote the trend to shorter PDSs, including by putting out examples of effective PDS content to encourage more meaningful and consumer-friendly disclosure.

A separate Government initiative — the Financial Literacy Foundation — is working to improve the general level of financial literacy in the Australian community. Product disclosure information therefore needs to be viewed as part of broader measures to improve consumer understanding of financial products.

‘Short form’ Product Disclosure Statement

Consumer feedback suggests that the average retail investor finds it difficult to absorb the large volume of information in some PDSs and is therefore unable to identify, or is deterred from identifying, essential core information.

One way to address this issue is to allow for an alternative ‘short form’ PDS, which would provide information that should, at a minimum, be absorbed by every investor in a financial product. The idea of a short form PDS does not mean that there would be a reduction in the information that a product provider must publicly disclose.

The short form PDS proposal would not apply to basic deposit and general insurance products (which are discussed separately), but would give providers of other financial products greater flexibility in how they inform consumers. Product providers would be able to decide whether all the currently mandated information should appear in a PDS, or in a short form PDS supplemented by

Refinement proposals

further information easily available to those consumers who require it. An internet website is an obvious method for enabling such broader disclosure. The proposed short form PDS would be given to the consumer in the same way and at the same time as the law currently requires. It would contain certain ‘core’ information about the financial product, based on elements of the existing PDS content requirements (section 1013D of the Corporations Act), such as:

• the name and contact details of the issuer (or seller);

• information about significant benefits, risks or other features of the product; • information about the cost of the product and amounts that will or may

become payable after its acquisition;

• information about any commissions or similar payments that may impact

on the return to the product holder;

• information about dispute resolution procedures; and • information about any cooling-off rights.

The short form PDS would require a prominent statement notifying the consumer that further information about the product is available and the means by which the consumer can access that material.

The core information required in the short form PDS may vary depending on the type of product in question. For example, it is likely that most products would not need to specifically set out taxation implications of holding the product in the short form PDS, but could refer the consumer to some other source containing this information. Similarly, the general requirement in section 1013E would not be part of a short form PDS but could be satisfied, for example, by disclosure on a product provider’s website.

Providers will remain liable for all the information they are required to provide under the legislation, even if a client does not receive or rely on the more detailed information. Information in the short form PDS would be viewed as a subset of the broader set of disclosure information and would need to be consistent with it. The general prohibition against information that is of a misleading or deceptive nature would naturally apply to the short form PDS.

Refinement proposals

Product Disclosure Statement

Issue The length and complexity of the information contained

in a Product Disclosure Statement is counterproductive to enabling consumers to understand and compare products.

Refinement Proposal 3 Amend the regulations to allow issuers of financial products to provide a ‘short form’ Product Disclosure Statement that contains core information, with full product information available on request or through an easily accessible forum, such as the internet.

Intended Outcome Provide consumers with more effective disclosure by

avoiding information overload that masks core information about a product.

4.

O

D

Where a financial product is recommended or issued over the telephone, a written PDS does not have to be given beforehand, provided that certain oral disclosures are made and that a written PDS is subsequently provided.

This information is difficult to deliver effectively to consumers, as it needs to be strictly scripted and delivered as a formal preamble. The result is that many consumers become frustrated and end their inquiry prematurely.

Amendments to the legislation were made to streamline the oral disclosure requirements, for example, to reduce the information that must be given where a written PDS is later provided (Corporations Regulations 7.9.80C and 7.9.80D).

Nevertheless, there is scope to streamline the oral disclosure requirements further. In particular, where a financial product is subject to a cooling-off period, the oral disclosure requirements could be reduced, such that consumers are only required to be informed that a cooling-off period applies and that a written PDS will be provided.

Refinement proposals

Oral Disclosure

Issue The product disclosure information that is required to

be delivered orally is too lengthy and complicated to be delivered and understood over the telephone.

Refinement Proposal 4 Specify by regulation that where a cooling-off period applies, oral disclosure can be reduced to referring to the availability of that cooling-off period and that a written Product Disclosure Statement will be provided.

Intended Outcome Oral disclosure that is simpler and more easily

understood by consumers.

5. G

A

W

The General Advice Warning (GAW) requirement in section 949A of the Corporations Act is designed to alert consumers that advice is general in nature and does not take into account their personal circumstances.

The legislation does not prescribe the actual wording of the GAW, however, most licensees and their authorised representatives have chosen to adopt the wording in the legislation. It is not always practical to use this exact wording and it might also not be particularly meaningful for consumers. For example, where there are regular communications between the adviser and its client, full repetition of the GAW wording, as set out in the legislation, for each communication is unnecessary.

It is the substance of the GAW that is important. The form of the GAW should be modified to suit the circumstances. To encourage this, ASIC will assist licensees to refine GAWs to be more easily understood by consumers. ASIC will also use its powers to provide relief from the GAW requirements, where appropriate.

Refinement proposals

General Advice Warning

Issue General Advice Warnings are not always meaningful

for consumers.

Refinement Proposal 5.1 ASIC will provide further guidance to develop simple General Advice Warnings conveying the substance of the legislative requirements, instead of relying on the precise wording of the Corporations Act. ASIC will also use its powers to provide relief, where appropriate.

Intended Outcome Provide consumers with simpler General Advice

Warnings that are more meaningful.

Advertisements and published statements

There is an anomalous position under the law for unlicensed product issuers who provide general advice in advertisements and published statements. Unlicensed product issuers must provide a warning similar to the GAW in section 949A of the Corporations Act for media advertising and published statements containing general advice about their products.

However, licensees do not need to use the GAW prescribed in section 949A in relation to advertising and published statements. Instead, licensees must indicate in the advertisement or statement that a PDS for the product is available and where it can be obtained, and indicate that the PDS should be considered in deciding whether to acquire, or to continue to hold, the product. This simpler warning is taken to complete the GAW requirements for licensees, in relation to advertising.

To promote consistent compliance with the GAW requirements by licensees and unlicensed product issuers in relation to advertising, ASIC will provide guidance and relief to the effect that unlicensed product issuers can fulfil their GAW requirements by using the simpler warnings available to licensees.

General Advice Warning

Issue The General Advice Warning requirements do not

apply consistently to different kinds of advertisers.

Refinement Proposal 5.2 In regards to advertising, ASIC will provide further guidance and/or relief to promote consistent and simple compliance with the General Advice Warning requirements by unlicensed and licensed product issuers.

Intended Outcome Consistent presentation of General Advice Warnings in

Refinement proposals

6. B

D

P

The inclusion of Basic Deposit Products (BDPs) in the regulatory coverage was the subject of much debate during the development and implementation of the legislation. Opponents of their inclusion have argued that the simplicity of such products, and the fact that they are relatively well-understood by consumers, obviate the need for their regulation as a financial product.

The Government has consistently rejected these arguments, viewing the inclusion of BDPs in the scope of financial services licensing as important to ensuring that consumers are given adequate information about such products and that staff advising on and issuing these products are competent and adequately trained. BDPs will continue to be included in the definition of financial product, and people who deal in or provide advice on BDPs will remain subject to the licensing requirements of the legislation.

Consumer familiarity with Basic Deposit Products

While it is important for the organisations offering BDPs to be licensed and subject to oversight by ASIC, it has been recognised from the outset that the straightforward nature of BDPs, and consumer familiarity with them, make sophisticated disclosure unnecessary. Accordingly, written FSG and SoA disclosure is not required for BDPs, although certain oral disclosure is required.

Issuers of BDPs are subject to a range of industry codes, such as the Banking Code and the Electronic Funds Transfer Code, as well as ASIC’s Guide to Good Disclosure of Transaction Banking Fees. In addition, issuers of BDPs are required to have various dispute resolution facilities available to consumers. These codes and practices deal extensively with disclosure of fees and costs and the resolution of consumer concerns.

The Government considers that there is scope to exempt BDPs from PDS requirements, subject to industry’s continued compliance with codes and practices, appropriate oral disclosure requirements remaining in place, and adequate and accessible disclosure of information such as fees, costs and dispute resolution procedures being provided with application documentation at the point of sale, and on the provider’s website.

Refinement proposals

Basic Deposit Products

Issue The detailed disclosure requirements are not

appropriate for Basic Deposit Products as these products are generally low risk and well understood by consumers.

Refinement Proposal 6 Exempt Basic Deposit Products from the Product Disclosure Statement requirements, by regulation, subject to appropriate oral disclosure and adequate and accessible disclosure of information on fees and charges on application, at point of sale and on a website.

Intended Outcome Avoid providing consumers with redundant information

whilst ensuring that they can still obtain information they require about Basic Deposit Products, such as fees and costs.

7. G

I

P

General insurance products are subject to disclosure requirements under the Corporations Act and the Insurance Contracts Act 1984 (IC Act). The issue of overlap between the IC Act and the Corporations Act was considered in the Final Report of the Review of the IC Act. That report recommended consideration should be given to the need for regulations under the Corporations Act that would clarify:

• that a PDS may include information that satisfies the disclosure

requirements of the ‘standard cover’ provisions of the IC Act; and

• that where the insurer fails to fulfil its standard cover disclosure obligations

through provision of a PDS, then the insured may rely upon the remedies of the IC Act as well as the remedies of the Corporations Act.

The IC Act Review recognised that the PDS would duplicate information that is already in the policy document, including information required to meet the standard cover disclosure requirements. The IC Act Review recommendations sought to limit duplication by clarifying that the PDS could be used to meet the disclosure requirements of the IC Act.

It is desirable, in relation to the general insurance industry, that the PDS become a document that blends the insurance policy with PDS and standard cover disclosure. Such a multi-purpose document should be (and arguably is already) accommodated by the Corporations Act.

Refinement proposals

The production of such a document in a ‘clear, concise and effective manner’ would ensure that all relevant information about a general insurance product is in one document. However, the combined document will, most probably, be lengthier than a typical insurance policy.

To promote simple and concise multi-purpose PDSs, the product disclosure requirements of the Corporations Act should be tailored for general insurance. For example, if certain PDS content requirements in section 1013D of the Corporations Act are not appropriate for general insurance, they should not apply. However, the Corporations Act should be flexible and allow tailored PDSs to include information uniquely relevant for general insurance. As such, a PDS for general insurance may include the following information:

• the name and contact details of the issuer (or seller);

• information about the cost of the product and amounts that will or may

become payable after its acquisition;

• information about dispute resolution procedures; • information about any cooling-off rights;

• information about significant benefits, risks or other features of the product; • where necessary, any additional information needed to meet the disclosure

requirements of the IC Act; and

• where necessary, any additional information needed to ensure the validity

of the PDS as a contract of insurance.

Unlike the earlier proposal for short form PDSs, this proposal would not offer licensees an alternative means of product disclosure, but would replace the existing PDS requirements for general insurance.

Refinement proposals

General Insurance Products

Issue General insurance products are subject to additional

specific disclosure requirements as insurance contracts, which add to the length of disclosure documents.

Refinement Proposal 7.1 Through the regulations, tailor the Product Disclosure Statement requirements for general insurance so that an insurer need only disclose certain core information, including that required to comply with Insurance Contracts Act obligations.

Intended Outcome Create Product Disclosure Statements, for general

insurance products, that are easily understood by consumers and better matched to the accompanying insurance policy statement.

Product Disclosure Statement on renewal

Technically, a new insurance product is sold to a consumer each time they renew their insurance policy. This means that a general insurer needs to provide a PDS on each renewal of the policy.

A PDS should not be required for general insurance policy renewals where there is no material change in the terms and conditions of the policy, other than in relation to the amount of premium payable.

General Insurance Products

Issue Product Disclosure Statements are required on each

renewal of an insurance product, even where there is no new product information to disclose.

Refinement Proposal 7.2 Specify through the regulations that a general insurance Product Disclosure Statement does not need to be given on renewal, where no material changes to the policy have occurred (other than in relation to the amount of premium payable).

Intended Outcome Minimise the provision of Product Disclosure

Statements to consumers on renewal, where the product has not materially changed.

Refinement proposals

F

8. R

/W

C

D

The legislation draws a distinction between retail and wholesale clients, with the bulk of the consumer protection measures applying only to retail clients. The definition of ‘retail client’ has several limbs (section 761G of the Corporations Act):

1. The first limb applies only to general insurance, and is product-based. An individual or small business that buys or receives advice on one of the specified general insurance policies (in subsection 761G(5)) is a retail client.

2. The second limb says that a person will always be considered a retail client where the relevant financial product is a superannuation product or a retirement savings account (RSA).

3. The third limb relates to all financial products except general insurance, superannuation and RSAs, and comprises four tests.

3.1. The first test, a ‘product value’ test, says that a person is not a retail client where they buy a financial product, or a financial service related to a financial product, and the value of the product is above the threshold prescribed in regulations (currently $500,000).

3.2. The second test says that small businesses (businesses employing fewer than 100 people if the business is or includes the manufacture of goods, and fewer than 20 people in other cases) are retail clients under the regime.

3.3. The third test says that a person with net assets or gross income for the last two years above certain thresholds (currently $2.5 million in net assets or gross income of $250,000) will not be considered retail. 3.4. The fourth test says that ‘professional investors’ are considered

wholesale clients. This category includes financial services licensees, listed entities, bodies regulated by the Australian Prudential Regulation Authority (other than trustees of certain smaller superannuation entities), people who control at least $10 million, and other entities that are presumed to have the expertise and/or access to professional advice such that they do not need the protections given to retail clients.

Refinement proposals

Refining the distinction

The tests determining whether a client is retail or wholesale are, necessarily, somewhat arbitrary. There will be people who, although not meeting the wholesale client tests, nevertheless possess sufficient experience or knowledge to make financial investment decisions without the need for the protections offered to retail clients. Likewise, there may well be people who qualify as wholesale clients and yet would benefit from the retail client protections.

Wherever the boundaries between retail and wholesale clients are drawn, some inequities will arise. However, this does not mean that the current tests cannot be improved.

The following refinements would improve particular areas where industry participants have argued that the retail/wholesale client tests do not work appropriately.

1. Companies and trusts controlled by wholesale investors, such as high net worth individuals, should be treated as wholesale, regardless of whether those companies or trusts meet the wholesale criteria in their own right (for example, a company controlled by a wholesale investor might fit the definition of a small business, and thus be treated as a retail client).

There are situations where minority interests in a company or trust controlled by wholesale investors may require retail protection, which would need to be taken into account in changing the current test.

2. Wholesale client status could be extended to certain related bodies corporate of bodies corporate that are wholesale — such as related bodies corporate whose shareholders are all wholesale investors.

3. The definition of professional investor can be simplified by replacing the current criterion requiring a person to control at least $10 million with a requirement that the person has gross assets of at least $10 million.

Retail/Wholesale Client Distinction

Issue The tests to determine the status of a client may lead

to inconsistent outcomes.

Refinement Proposal 8.1 Amend the regulations to extend wholesale treatment to companies and trusts that are controlled by

wholesale investors and related bodies corporate of wholesale corporations.

Intended Outcome More consistent application of the retail/wholesale client definitions in a way that takes into account the way consumers structure their personal and business affairs.

Refinement proposals

Retail/Wholesale Client Distinction

Issue The tests to determine the status of a client may not

work appropriately.

Refinement Proposal 8.2 Amend the regulations to simplify paragraph (e) of the definition of professional investor to be a person with a minimum of $10 million in gross assets.

Intended Outcome Provide greater certainty on the application of the professional investor test and reduce redundant paperwork received by these investors.

Accountants’ certificates

The current six-month renewal period for accountants’ certificates which certify a person’s wealth or income could be extended without undermining the integrity of the wholesale client criteria.

This can be dealt with by extending the currency of the certificate to 24 months, or until an earlier time when the client notifies the licensee that the certificate no longer accurately reflects the client’s income and/or assets. Implementation of any amendments would also need to apply to a similar provision for certificate renewals for sophisticated investors in securities (paragraph 708(8)(c) of the Corporations Act).

Retail/Wholesale — Accountants’ Certificates

Issue Accountants’ certificates are required to be renewed

too frequently.

Refinement Proposal 8.3 Amend the regulations to extend the six-month renewal period for accountants’ certificates to 24 months.

Intended Outcome Reduce frequency of renewals certifying high net worth

investors’ wealth.

9. S

S

‘

’

In situations where a licensee or an authorised representative provides a service to a retail client through an intermediary, the legislation currently requires the licensee or authorised representative to fulfil relevant obligations (including providing disclosure) to the retail client. That is, the legislation ‘looks through’ the intermediary and treats the service as being provided directly by the licensee or authorised representative to the retail client.

Refinement proposals

For example, where a stockbroker executes a transaction on behalf of the retail client of an intermediary (such as a financial adviser), the stockbroker is generally obliged to provide the client with a FSG. The stockbroker will deal with the financial adviser and will generally have no contact with the client. Other examples include the provision of general advice and custody services by a licensee through an intermediary.

In such situations, it seems of questionable benefit to place obligations (such as disclosure requirements) on the licensee or authorised representative in relation to the retail client.

ASIC has provided relief relating to the provision of FSGs for certain secondary services (Class Orders CO 04/1571, CO 04/1572 and CO 04/1573). These modifications will be taken into account in refining the law.

Proposed refinements

One option would be for the legislation to treat the intermediary as the client of the licensee or authorised representative, with the intermediary being responsible to the retail client for all aspects of the service, including that part that may be provided by the licensee or authorised representative, regardless of how the secondary service arises.

However, given the many different scenarios in which secondary services may be provided, a ‘one size fits all’ approach is unlikely to be appropriate. In these circumstances, the following refinements are proposed:

• where an intermediary’s licence covers the same services as those provided

by the secondary service provider and where the intermediary accepts responsibility for the services provided by the secondary service provider — in this case, it is proposed to exempt the secondary service provider from the FSG requirements;

• where the intermediary is not able to (because its licence does not cover the

services of the secondary service provider) or will not accept responsibility for the services provided by the secondary service provider (even though its licence does cover the same services) — in this case, it is proposed to modify the law so that the secondary service provider only has to provide access to its FSG (including on request).

Refinement proposals

Secondary Services ‘look-through’

Issue It is not necessary to apply the Financial Services

Guide requirements to a secondary service provider where an intermediary is able to provide, and accepts responsibility for providing, the services of the

secondary service provider.

Refinement Proposal 9.1 Specify through regulations that a secondary service provider will be exempt from the Financial Services Guide requirements where the intermediary’s licence covers the same services as the secondary service provider and the intermediary accepts responsibility for the services provided by the secondary service

provider.

Intended Outcome To reduce the excessive disclosure provided to

consumers by both intermediaries and secondary service providers.

Secondary Services ‘look-through’

Issue It is not appropriate to require delivery of a secondary

service provider’s Financial Services Guide where it is otherwise made available.

Refinement Proposal 9.2 Specify through regulations that a secondary service provider does not have to give its Financial Services Guide to a retail client where the intermediary informs the client how the secondary service provider’s Financial Services Guide is made available (including on request).

Intended Outcome Simplify and reduce disclosure information provided to

consumers, where the intermediary is not able to or will not accept responsibility for providing services of a secondary service provider.

Another circumstance is where a secondary service provider is unlicensed and not in Australia. A proposed refinement expanding the application of Corporations Regulation 7.6.01(1)(na) to deal with this situation is set out in the ‘jurisdictional reach’ section of this paper.

Refinement proposals

10. G

A

D

The definition of general advice is broad, as general advice constitutes any financial product advice that is not personal advice. The definition of financial product advice (section 766B of the Corporations Act) includes recommendations, statements of opinion or reports of either of those things, intended to influence people in making a decision about a financial product.

Narrowing the scope of the definition

Concern has been expressed at the breadth of the definition of financial product advice (and hence general advice), in that it might include implied recommendations, in relation to both specific products and classes of products. This might make it difficult, in certain cases, for licensees or their authorised representatives to have any conversations with consumers without triggering the general advice requirements.

Adjustments are warranted. Specifically, advice that is not linked to a specific product and where no remuneration or other benefit is involved should not constitute general advice.

Also, advice that a product issuer provides in relation to its own products should not be considered general advice. The product issuer should be granted a licensing exemption where the only advice provided relates to its own products, subject to certain conditions, which might include that:

• the product issuer does not hold itself out as an adviser;

• the product issuer does not hold a licence authorising it to provide general

advice;

• the product issuer does not receive remuneration or other benefits in respect

of the general advice;

• the product issuer makes a PDS available and warns people who receive the

advice to read the PDS before making a decision; and

• if the advice relates to the acquisition of a product, cooling-off rights apply

Refinement proposals

General Advice Definition

Issue The definition of financial product advice, and hence

general advice, is too broad.

Refinement Proposal 10.1 Specify through regulations that financial product advice does not include general advice:

• from an unlicensed product issuer about its own products; or

• from anyone that is not linked to a specific product, where no remuneration or other benefit is received.

Intended Outcome Allow consumers to make general inquiries about

products without responses to such inquiries triggering the general advice requirements.

General and personal advice

Concern has also been expressed that the definition of personal advice is too broad and captures some advice that should be treated as general. Specifically, the following issues have arisen:

1. Concerns about whether any advice provided to a person becomes personal advice merely because the provider has personal information about the recipient. For example, where a superannuation fund provides limited and generic information in response to queries from a fund member.

2. Concerns about whether generic advice constitutes personal advice (such as stock research, provided to clients based on limited knowledge of personal information about those clients; or information provided in relation to standard, retail general insurance such as motor vehicle insurance).

3. Concerns about whether online calculators and online risk profilers constitute personal advice.

The definition of personal advice applies to some communications that should more appropriately be treated as general advice. Clarifying the scope of the definition of personal advice would assist the general advice definition.

Refinement proposals

General and Personal Advice Definition

Issue The definition of personal advice may apply to some

communications that should more appropriately be treated as general advice.

Refinement Proposal 10.2 ASIC will provide guidance and/or relief to clarify that the mere possession (as opposed to consideration) of information about a client’s relevant personal

circumstances does not render advice given to that client personal advice.

Intended Outcome Clarify when the personal advice requirements apply,

to provide disclosure more appropriately to consumers.

General and Personal Advice Definition

Issue The definition of personal advice may encompass

online calculators that should more appropriately be treated as general advice.

Refinement Proposal 10.3 ASIC will provide further guidance and/or relief on the provision of basic online calculators to promote their use.

Intended Outcome Promote the provision of basic online calculators to enable consumers to understand and compare financial products and services without that being classed as personal advice.

11. J

R

The provisions of the legislation which set its jurisdictional reach are reasonably broad. Some concern has been expressed that they may inadvertently capture parties or transactions not intended to be covered. The legislation has been interpreted as applying beyond its intended jurisdictional scope. For example, some foreign financial service providers have advised existing and potential Australian retail clients that they are unable to provide financial services to Australian residents.

The legislation was intended to regulate activities carried on in Australia, including people who promote their financial services to consumers in this country. The intention was to protect Australian investors from being induced or targeted by foreign financial service providers that are not subject to the Australian financial services licensing regime, and not to attempt to regulate people in Australia accessing financial services they have sought out while in another jurisdiction and maintain on their return to Australia.