House of Representatives

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)

11 Licensing of providers of financial services

11.1 This Part outlines the prerequisites for providing financial services in Australia. In particular, it details how a person may obtain a financial services licence, and the obligations imposed on financial services licensees.

11.2 Proposed Part 7.6 replaces licensing requirements currently contained in:

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Chapters 7 and 8 of the proposed Corporations Act;

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the Insurance (Agents and Brokers) Act 1984 ; and

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the Superannuation Industry (Supervision) Act 1993 .

Preliminary

11.3 Proposed Division 1 defines representative for the purposes of this Part to include an authorised representative of the licensee, an employee or director of the licensee, an employee or director of a related body corporate of the licensee, or any other person acting on behalf of the licensee.

Requirement to be licensed or authorised

11.4 The requirement for a person to be licensed or authorised is set out in proposed Division 2. A person who carries on a financial services business in this jurisdiction must hold an Australian Financial Services Licence covering the provision of the financial services. The terms person and financial services business are defined in proposed Part 7.1.

11.5 The concept of carrying on a financial services business in this jurisdiction is affected by proposed section 911D (see below) and by Division 3 of Part 1.2 of the existing Corporations Law. For the purposes of the new Chapter 7, paragraph 21(3)(e) of the Law will not apply. The common law meaning of carrying on a business encompassing elements of system, repetition and continuity suggests that one-off transactions relating to the provision of financial services and financial products are unlikely to be caught by the new regime.

11.6 Proposed subsection 911A(2) sets out various exemptions from the requirement to hold a financial services licence. In a prosecution under this provision, a defendant would have an evidential burden in relation to showing that they were exempt. The following persons are exempt from holding a licence:

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representatives of a licensee whose licence covers the provision of the service;

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representatives of a person who is exempt from the requirement to hold a licence;

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product issuers who merely issue, vary or dispose of a product where a second person (a licensee or representative of a licensee) offers to arrange for the issue, variation or disposal of the product and the product was issued to the client, varied or disposed of in accordance with this arrangement;

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product issuers who vary or dispose of a product at the direct request of the client who holds the product. This exemption recognises that clients may on their own initiative seek to vary or cancel a product without utilising the services of an intermediary, and the fact that the client merely exercises the features of a product - variation or cancellation - does not warrant licensing of the product issuer. In contrast, where a product issuer, for example, provided financial advice in relation to variation or cancellation, a licence would be required;

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financial market or clearing and settlement facility operators who provide a financial service incidental to the operation of a licensed financial market or clearing and settlement facility. Market operators must be licensed under Part 7.2 and a clearing and settlement facility operators must be licensed under Part 7.3;

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a service provider who is a member of a declared professional body -the declared professional body provisions are contained in Division 7 of Part 7.6;

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receivers, managers, administrators and personal representatives of deceased persons (including deceased financial services licensees);

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APRA regulated bodies that provide financial services only to wholesale clients. The rationale for requiring the licensing of service providers who only provide services to wholesale clients is to ensure market integrity. Where such service providers are regulated by APRA or an approved overseas regulatory authority, market integrity objectives are met;

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persons regulated by approved overseas regulatory authorities that provide financial services only to wholesale clients;

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persons who provide services only to related bodies corporate;

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trustees of self-managed superannuation funds who provide services in that capacity;

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exemptions prescribed in regulations or specified by ASIC.

11.7 These exemptions from the requirement to hold an Australian Financial Services Licence do not apply if the service provided is the operation of a registered managed investment scheme.

11.8 Proposed section 911B prohibits a person from providing financial services on behalf of another person (the principal) who carries on a financial services business except in the following situations:

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employees and directors of a licensee;

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employees and directors of a related body corporate of a licensee. While these persons will not require authorisation, the relevant licensee will continue to be responsible for the competence and conduct of these individuals;

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authorised representatives of a licensee;

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employees of authorised representatives of a licensee, where the service provided is a basic deposit product or facility for making non-cash payments that is related to a basic deposit product;

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licensees whose licence covers the provision of the service. Note however that in general a financial services licensee cannot be the authorised representative of another financial services licensee (see proposed sections 916D and 916E);

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principals exempt under proposed subsection 911A(2);

11.9 Proposed section 911C prohibits persons from holding out that they have a licence, are exempt from the requirement to hold a licence, act on behalf of another person in providing a service, or that their conduct is within authority granted by a particular licensee, unless that is the case.

11.10 Proposed section 911D is relevant to determining when a financial services business is taken to be carried on in this jurisdiction for the purposes of Chapter 7. It provides that a person is carrying on a financial services business where they intend to induce people in this jurisdiction to use the financial services the person provides, or their actions are likely to have that effect. This provision is intended to make it clear that service providers who target Australians from overseas, by whatever means (including internet and telephone), will be taken to carry on a financial services business in this jurisdiction and will therefore require an Australian financial services licence and be subject to the obligations attaching to that licence. Proposed section 911D does not limit the circumstances in which a financial services business is carried on in this jurisdiction.

Obligations of financial services licensees

General obligations

11.11 A financial services licensee must during the currency of their licence meet the general obligations outlined in proposed section 912A to:

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provide those financial services covered by the licence competently and honestly;

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comply with any conditions imposed by ASIC on the licence;

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take reasonable steps to ensure that its representatives comply with the requirements of the Act (including obligations under proposed Parts 7.6, 7.7 and 7.8) and any other law of the Commonwealth, a State or a Territory that relates to the provision of financial services. In order to satisfy this requirement, it is anticipated that a licensee would need to actively monitor and supervise the activities of its representatives to ensure compliance.

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maintain sufficient financial, technological and human resources to properly provide financial services and supervise representatives;

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maintain competence, skills and experience to provide financial services;

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ensure representatives are adequately trained and are competent to provide financial services;

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have internal and external dispute resolution procedures to handle complaints from retail clients. These procedures must be approved by ASIC in accordance with regulations;

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have adequate risk management systems (unless the licensee is an APRA-regulated body); and

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comply with all other requirements imposed on licensees under the Act, and any other prescribed obligations.

11.12 Proposed sections 912B to 912F impose further obligations on licensees to:

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have arrangements for compensating retail clients (where they provide financial services to retail clients) for losses or damage suffered through a breach of the obligations imposed by Chapter 7 on licensees and their authorised representatives. These arrangements must be in accordance with the regulations or be approved in writing by ASIC. It is intended that the regulations will set minimum standards for these compensation arrangements. Due to the wide range of business activities that will be undertaken by licensees, the compensation arrangements that will be required will vary significantly depending on the type of financial services which the licensee provides;

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comply with a direction of ASIC to provide a written statement or audit report to ASIC;

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notify ASIC of an inability to meet, or a breach of, an obligation under proposed sections 912A or 912B, and notify ASIC where the licensee becomes a participant in a licensed market or licensed clearing and settlement facility (or ceases to be such);

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give assistance to ASIC as requested, in relation to whether the licensee and its representatives are complying with the Act;

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include the licensees licence number in all documents in which the licensee identifies itself in connection with providing financial services under the licence. At the time an application for a licence is granted, ASIC must give the licensee a unique licence number (see proposed section 913C). The offence for contravening this provision is strict liability due to the technical nature of the offence, the need to ensure effective enforcement and in view of the lower pecuniary penalty that applies.

Australian financial services licences

11.13 Proposed Subdivision A outlines how to obtain a licence. To apply for a licence a person must lodge with ASIC an application under proposed section 913A, together with the prescribed information and any prescribed documents. The classes of persons who may be granted a licence have been extended from natural persons and bodies corporate to include partnerships. This extension has been intended to provide industry participants with greater flexibility in the way they structure their activities.

11.14 ASIC must grant the licence if:

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the application was made properly;

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ASIC has no reason to believe that the applicant will not comply with licensees obligations;

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ASIC is satisfied that the person (if a natural person) is of good character or (if a body corporate) the applicants responsible officers are of good character. ASIC must have regard to convictions for serious fraud in the last 10 years, suspension or cancellation of an Australian financial services licence, and banning and disqualification orders under Division 8; and

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the applicant meets any other prescribed requirements.

11.15 ASIC must give the applicant an opportunity to be heard before refusing to grant a licence.

11.16 Subdivision B allows ASIC to impose conditions on the licence. ASIC may at any time impose, vary or revoke conditions on a licence, under proposed section 914A. However, ASIC must first give the licensee an opportunity to make submissions and give evidence at a private hearing.

11.17 Where the licensee is regulated by APRA, ASIC must consult with APRA before imposing any or additional conditions, or varying conditions. This is intended to prevent unnecessary duplication of regulation by the two regulators. ASICs power to vary or revoke conditions does not extend to conditions prescribed by regulation.

11.18 If the licensee is an ADI and the proposed condition would have the result of significantly limiting or restricting the ADIs ability to carry on all or any of its banking business, then ASIC does not have the power to impose the condition, and the power to impose, vary or revoke such a condition are taken to be powers of the Minister (proposed subsection 914A(5)).

11.19 Proposed Subdivision C outlines when ASIC may vary, suspend or cancel a licence. Provisions 915A to 915J are modelled on existing Corporations Law sections 824 to 827 but have been rewritten to, among other things, take account of the scope of persons who may obtain a licence under the new financial services licensing provisions.

11.20 Proposed subsection 915I provides for consultation with APRA in relation to APRA regulated bodies and situations relating to ADIs where the power to suspend a license is not ASICs but the Ministers. This provision operates in a similar way to the imposition of conditions discussed above.

Authorised representatives

11.21 Under proposed section 916A, a financial services licensee may authorise a person to provide a financial service or financial services on its behalf by giving the person a written notice. Representatives may be authorised to provide all of the services covered in a principals licence or a subset of those services.

11.22 Natural persons, bodies corporate and partnerships may be authorised representatives. This represents a change from the existing Corporations Law which prohibits a body corporate from acting as a representative. This new approach will provide authorised representatives with greater flexibility and will accommodate existing representative structures.

11.23 An authorisation may be revoked by a licensee at any time by written notice.

11.24 Authorised representatives are prohibited from authorising persons to act as their representative or as a representative of the licensee under proposed section 916B. Where a body corporate is authorised as the representative of a licensee, it may give an individual a written notice authorising that individual to provide specific financial services on behalf of the licensee, but only if the licensee consents.

11.25 Proposed section 916C permits an authorised representative to act for more than one licensee but only where each person has consented to the person also being the representative of each of the other licensees, or each of those licensees is a related body corporate of each of the other licensees.

11.26 As a general rule, a financial services licensee is prohibited by proposed section 916D from acting as the authorised representative of another financial services licensee. The only circumstances in which this may be permitted is where a binder exists in relation to financial services provided in relation to insurance (proposed section 916E). This exception will allow the continuation of current industry practice. Binder is defined in proposed section 761A to mean an authorisation given to a person by a financial services licensee who is an insurer, to either enter into risk insurance contracts of the insurer as insurer, or deal with and settle risk insurance claims against the insurer as insurer. This definition is based on section 9 of the IABA.

11.27 Financial services licensees are required by proposed section 916F to notify ASIC within 10 business days of authorising a representative or revoking the authorisation of a representative. The notice provided to ASIC must include the authorised representatives contact details, details of the authorisation, and details of any other financial services licensee for whom the representative is authorised to act.

11.28 In a prosecution for a contravention of proposed subsection 916F(3), strict liability applies to the circumstance that an authorised representatives details have changed. This will effectively place a greater onus on licensees keep track of changes in the details of authorised representatives and will allow for effective enforcement of the provision.

11.29 Proposed section 916G outlines circumstances in which ASIC may give information to a financial services licensee about a person whom ASIC believes is, or will be, an authorised representative of the licensee. The provision also outlines what use may be made of the information.

Liability of financial services licensees for authorised representatives

11.30 Financial services licensees are responsible for the conduct of representatives (including employees or directors of the licensee, authorised representatives of the licensee and any other person acting on behalf of the licensee) that relates to the provision of financial services on which a client could reasonably be expected to rely and on which the client relied in good faith (proposed section 917A). Under proposed section 917E, the responsibility of licensees extends to liability for any loss or damage suffered by a client as a result of the conduct of representatives.

11.31 The liability provisions cover circumstances in which a representative acts for only one licensee and circumstances in which a representative acts for multiple licensees. The joint and several liability provisions that apply where there are multiple licensees have been modelled on provisions in the IABA but have been modified to confine liability to circumstances in which the conduct of the representative is clearly attributable to one or a sub-set of licensees.

Responsibility if representative of only one licensee

11.32 Where a representative acts for only one licensee, that licensee is responsible under proposed section 917B for the conduct of the representative, whether or not the representatives conduct was within authority.

11.33 Within authority is defined in proposed section 917A to mean, in the case of an employee - within the scope of their employment; in the case of a director - within the scope of their duties as a director; in any other case - within the scope of the authority given by the licensee.

Representatives of multiple licensees

11.34 Where a representative acts for more multiple licensees, those licensees will be responsible as follows:

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where a person is the representative of multiple licensees, but is representative of only one of those licensees in respect of a particular class of financial service to which the conduct relates - that licensee is responsible, whether or not that conduct is within authority, and any other licensees for whom the representative acts will not be responsible (proposed subsection 917C(2));

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where a person is the representative of multiple licensees, and is the representative of more than one of those licensees in respect of a particular class of financial service to which the conduct relates, and the conduct is within authority in relation to only one of those licensees - that licensee is responsible, and any other licensees for whom the representative acts will not be responsible (proposed subsection 917C(3));

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in all other cases, all of the licensees are jointly and severally responsible for the conduct, whether or not the representatives conduct is within authority in relation to any of them (see proposed subsection 917C(4)).

11.35 However, a financial services licensee is not responsible under proposed sections 917B or 917C for the conduct of their representative where the representative clearly disclosed to the client, before the client relied on the conduct, that the conduct was not within authority (see proposed section 917D).

11.36 The effect of these provisions is to give the client the same remedies against the licensee that the client has against the representative (proposed subsection 917F(1)). However, it does not impose any criminal liability or any additional civil liability under a provision of the proposed Corporations Act (other than that Division).

11.37 The provisions do not relieve representatives of any liability they may have to a client, according to proposed subsection 917F(4). Nor do the provisions prevent licensees from entering into agreements with representatives providing that the representatives indemnify the licensee for any liability of the licensee in respect of the representative (proposed subsection 917F(6). A licensee for whom a representative acts may also indemnify another licensee in respect of the representative (proposed subsection 917F(6)).

Declared professional bodies

11.38 Division 3 provides a mechanism for professional bodies, whose members may give financial product advice in the course of carrying on their profession, to come within the licensing regime. This mechanism recognises that some industry participants such as accountants, lawyers and actuaries are already subject to a range of strict professional requirements, including competence and ethical standards and are subject to disciplinary procedures where they breach those standards.

11.39 Where members provide financial services other than advice - for example dealing - a licence or authorisation from a licensee will be required. The declared professional body (DPB) mechanism does not extend to dealing as:

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unlike financial advice, dealing is not an activity that has historically been an aspect of the relevant professions; and

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given that the DPB mechanism is a first step along the path of self-regulation in this area, it seems prudent to limit its scope until the success of the measure may be assessed.

11.40 This mechanism has not been inserted as an alternative to incidental advice. The general refinement of the definition of financial product advice will ensure that a distinction is clearly drawn between advice that falls within the financial services reform regime and advice that falls outside.

11.41 Once advice falls within the regime then it is appropriate from a regulatory neutrality point of view that the standards imposed by the regime are met irrespective of who is providing that advice - whether they be accountants, solicitors, actuaries, insurance agents, or securities dealers. The DPB mechanism and the licensing mechanisms are the two means by which these standards are imposed.

Applying for a declaration

11.42 A professional body may apply to ASIC for a declaration to be made under proposed section 918B (see proposed section 918A). ASIC may declare that a professional body is a DPB if ASIC has no reason to believe that the body will not comply with the obligations that will apply to it if the declaration is made.

11.43 In assessing the adequacy of the above requirements it is anticipated that ASIC would consider the requirements applying to licensees.

Variation and revocation of declaration

11.44 Proposed section 918C sets out the circumstances in which ASIC may vary or revoke a declaration, including the circumstances in which the DPB must be given an opportunity to be represented at a hearing and to make submissions. The section also sets out requirements for the form in which the body is notified of variation or revocation and the requirement for ASIC to furnish a statement of reasons for the action taken. To ensure that the interests of clients are protected in the event of variation or revocation of a declaration, ASIC may specify that certain provisions of the declaration continue as though the variation or revocation had not happened.

Conditions on declaration

11.45 Under proposed section 918D, ASIC may impose, vary or revoke conditions on a declaration. However, ASIC must first give the body an opportunity to make submissions and attend a hearing in relation to the matter.

Obligations of declared professional bodies

11.46 Subdivision B sets out the obligations on DPB. These essentially replicate the general obligations imposed on financial services licensees under proposed section 912A, with the following additions - the DPB must:

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have adequate powers to discipline or remove members;

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ensure that adequate conduct and disclosure requirements apply to members of the body; and

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have adequate arrangements for compensating clients for loss or damage suffered through any breach of obligations.

11.47 The Bill also requires DPBs to:

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provide a statement to ASIC when directed to do so (proposed section 919B); and

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notify ASIC of certain matters - namely, a breach or impending breach of an obligation under the Act, or disciplinary action against a member of the body (proposed section 919C);

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provide assistance to ASIC where the regulator is checking on compliance with the Act (proposed section 919D); and

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establish and maintain a register of members (proposed section 919E).

Banning or disqualification of persons from providing financial services

11.48 Proposed sections 920A to 921A provide ASIC with powers to ban or disqualify persons from providing financial services. These provisions are modelled on existing provisions (sections 828-836, 838, 1192A-1199A, and 1201 of the Corporations Law), but have been rewritten to take into account the scope of the new provisions.

Registers relating to financial services

11.49 ASIC will establish and maintain a register of financial services licensees, authorised representatives and DPBs, and make the register available for public inspection without charge (proposed sections 922A and 922B).

11.50 This approach to the keeping of registers represents a change for participants currently operating under the Corporations Law, which requires ASIC to maintain a register of licence holders and licensees to keep a register of proper authority holders.

11.51 The new regime will result in the consolidation of information about licensees and authorised representatives, and will streamline access for people who seek information about these classes of people. It also obviates the need for licensees to provide ASIC with information about the number of persons who are authorised representative of the licensee. Therefore, existing Corporations Law requirements relating to licensee annual statements have not been carried over to the new regime. Further, given the disclosure obligations in the Bill, Part 7.7 of the existing Corporations Law relating to registers of interests in securities has also been omitted from the new regime.

Restrictions on the use of terminology

11.52 The Bill restricts the use of certain words and expressions by financial service providers. It will be an offence for a person to use the words independent, impartial or unbiased (or like words or expressions) unless:

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the person and, where relevant, their employers or associates do not receive commissions, remuneration based on volume bonus, or gifts or benefits from product issuers which may reasonably be expect to influence the person;

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the person in providing financial services operates free from any direct or indirect restrictions on the financial products in respect of which they provide financial services (restrictions imposed by way of licence conditions are not direct of indirect for the purposes of these provisions); and

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the person operates without any conflicts of interest that might otherwise be created by their associations or relationships with product issuers that might reasonably be expected to influence the person in providing financial services (proposed section 923A).

11.53 It will be an offence under proposed section 923B for a person to use the restricted words listed below, or like words or expressions, unless ASIC authorises the use of the word or words by way of a condition on a licensees licence. The restricted words and expressions are:

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Stockbroker or sharebroker;

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Futures broker;

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Insurance broker or insurance broking;

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General insurance broker;

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Life insurance broker;

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any other expression prescribed by the regulations.

11.54 ASIC will only be able to authorise the use of these words if the licensee is permitted, under the licence, to provide a financial service relating to either securities, futures or contracts of insurance. The licensee must also be a participant in a licensed financial market, or must act on behalf of the intending insureds, as relevant.

Agreements with unlicensed persons

11.55 Proposed sections 924A to 925I provide a range of protections to clients who enter into agreements with unlicensed persons. These provisions do not apply to people who are exempt from holding a financial services licence, so they apply only to people who are not licensed, but should be.

11.56 These provisions are modelled on existing Part 7.3, Division 2 of the Corporations Law, and have been amended to reflect the scope of the new regime.