This is an edited extract fromUnderstanding the Stock Exchange by N E Renton
The Financial Services Reform Act 2001 (FSRA) was a major piece of legislation by the Australian government designed to provide consumer protection for users of financial products and services. The Act commenced on 2002-03-11. After a two-year phasing-in period it became fully operational on 2004-03-11.
Many of its provisions were based on the recommendations made by the Financial System Inquiry (FSI) of 1996-97, better known as the Wallis Committee.
The FSI had concluded that the regulation of the financial system in Australia was piecemeal. Regulation had had regard to the particular industry being regulated and to the particular product being provided.
This was considered not only to be inefficient but also to give rise to opportunities for regulatory arbitrage. In some cases it also led to regulatory overlap and confusion or to regulatory gaps.
The new Act attempted to address these deficiencies. In particular, it amended the Corporations Act 2001 by inserting new sections 760A to 1101J in place of the corresponding weaker provisions.
The legislation set up a single licensing regime for financial sales, advice and dealings in relation to financial products. It provided for a consistent disclosure system for all types of comparable financial products. It created a single authorisation procedure for financial exchanges and clearing and settlement facilities.
The new regulatory framework is administered by the Australian Securities and Investments Commission (ASIC). It requires all industry participants to hold either an Australian Financial Services (AFS) Licence or an authority from a licence holder.
The regime covers a wide range of financial products and services, including the following:
The licensing requirements apply to financial intermediaries, including insurance agents and brokers, to securities advisers and dealers and to futures brokers.
There are also licensing requirements for the operators of financial markets, including the Australian Stock Exchange itself, and for the providers of clearing and settlement facilities for securities including shares and derivatives.
Licences set out the specific types of financial services which the licence holder is authorised to provide.
However, it should be noted that the legislation does nothing to protect direct property investors - a significant weakness.
REQUIREMENTS ON LICENSEES
Licensees are expected to ensure that their staffs are properly trained and supervised, that their finances are tightly controlled and that they carry adequate insurance to protect their clients.
With some exceptions stockbrokers and all other financial services licensees and their authorised representatives when providing financial services to retail clients are required to give those retail clients a financial services guide (FSG) at the start of the relationship (in the case of new clients) and at the 2004-03-11 full commencement of the legislation (in the case of existing clients).
The purpose of this document is to ensure that retail clients receive key information about the type of services being offered and the applicable charges. The guide also covers other related matters, such as internal and external complaints handling procedures, trust accounts and privacy aspects.
Where a retail client is given personal advice relating to financial products the organisation concerned must also provide the client with a written statement of advice (SoA). Inter alia, this statement must disclose any conflicts of interest and the consequences of switching any investments.
However, a communication that does not involve the expression of an opinion and that does not amount to the giving of a recommendation is not regarded as constituting financial product advice within the meaning of that term in the legislation. Thus the giving of purely factual information avoids this red tape.
For statements of advice to be meaningful it would obviously be necessary for clients to give their advisers detailed and up-to-date information as to their personal circumstances and those of their family. This would need to cover not only financial data but also matters such as tolerance to risk and retirement plans.
However, many investors do not wish to provide such a client profile on the grounds of invasion of privacy and, of course, there is no obligation on them to produce one if they do not wish to do so. In that case the SoA has to include an appropriate warning.
On the other hand, it has to be realised that no specific investment is ever "good" or "bad" in isolation - it has to be judged in terms of the needs, aspirations, tolerance of risk, wealth, income, existing holdings and other circumstances of each particular investor.
Another complication can come about because clients often wear more than one hat - for example, they may be investing partly on their own account, partly on behalf of a family trust and partly on behalf of a DIY superannuation fund, all with different objectives.
Less stringent rules apply to further market-related advice (FMRA) than to the original advice.
EXPENSIVE RED TAPE
All this paperwork involves expense, although computer systems can assist. Inevitably these extra costs will be passed on to clients in one form or another.
This type of compulsory consumer protection will probably help some people, but the universe of investors includes those who are already very knowledgeable and experienced and who will get little benefit. It also includes investors who act on the latest rumour and who will not really want to be told that what they are doing is unwise.
Licensees who recommend the purchase of a particular financial product naturally also need to give their clients a product disclosure statement (PDS) setting out the details specific to that product, including where appropriate information in regard to any cooling off period.
To sum up, the new legislation wisely continues to lay emphasis on two old-established principles for all investment advisers:
© Copyright N E Renton 2006
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