House of Representatives

Explanatory Memorandum

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

14 Financial product disclosure

Preliminary

14.1 Proposed Part 7.9 of the draft Bill deals with disclosure throughout the life of a financial product from point of sale disclosure through to ongoing disclosure and periodic reporting requirements. Broadly it provides for:

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point of sale disclosure through the giving of a Product Disclosure Statement (PDS) (proposed Division 2);

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other obligations in relation to financial products (proposed Division 3) encompassing:

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ongoing disclosures (proposed section 10177B);

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periodic reporting requirements (proposed section 1017D);

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handling money from applicants for financial products (proposed section 1017E);

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confirmation of transactions in relation to financial products (proposed section 1017F); and

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alternative dispute resolution mechanisms for product issuers (proposed section 1017G);

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requirements for advertising in relation to financial products (proposed Division 4); and

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cooling-off periods for certain financial products (proposed Division 5).

14.2 This disclosure regime will replace a range of existing disclosure regimes for financial products, some of which are legislative and some of which are self-regulatory:

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disclosure requirements for superannuation interests under the SIS Act and Regulations to the extent that they are dealt with under Part 7.9;

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disclosure requirements for retirement savings accounts under the RSA Act and Regulations;

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disclosure requirements for life insurance under Life Insurance Circular G.I.1;

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disclosure requirements for the products of deposit taking institutions under the Banking, Building Society and Credit Union codes of practice, and the EFT Code of Practice;

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disclosure obligations for interests in managed investment schemes under the fundraising provisions of the proposed Corporations Act; and

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disclosure obligations for futures under Chapter 8 of the proposed Corporations Act.

14.3 The Part 7.9 disclosure regime will also supplement, but not replace, disclosure requirements for insurance under the Insurance Contracts Act. Consequential amendments to the Insurance Contracts Act will be necessary to take account of the disclosure obligations in Part 7.9 and will be dealt with in subsequent legislation.

14.4 Part 7.9 will not replace the disclosure requirements for shares and debentures under Chapter 6D of the proposed Corporations Act. However, some consequential amendments are necessary to Chapter 6D to take account of the new disclosure regime and these are dealt with in Part 2 of Schedule 1.

Disclosure requirements for superannuation

14.5 Superannuation products (as defined in proposed paragraph 764A(1)(g)) are brought within the Part 7.9 disclosure regime. The approach taken in the draft provisions is to express the disclosure obligations in terms of general principles capable of application across the full range of financial products. While it is envisaged that for many products the general principles will be sufficient, it is recognised that for some products there will need to be greater specificity in how the general principles will apply.

14.6 In relation to superannuation products, the approach that is to be taken will be the use of regulations to outline in greater detail how the general obligations are to be complied with.

Disclosure requirements for consumer credit insurance

14.7 The provisions include consumer credit insurance within the Part 7.9 disclosure regime. This will replace the specific disclosure requirements for consumer credit insurance under the Insurance Contracts Act. To the extent that more detailed disclosures are currently required under those provisions, they will be dealt with in regulations under Part 7.9.

Which products does the part apply to

14.8 In general the provisions in proposed Part 7.9 will apply to all financial products as defined in Part 7.1, other than securities and debentures, stocks or bonds issued or proposed to be issued by a government. As noted in the discussion in Part 6 of this Explanatory Memorandum, the definition of security for the purposes of proposed Chapter 7 differs from the existing definition in the Corporations Law in that it only includes shares and debentures, and not interests in managed investments schemes. Thus for the most part, the provisions in Part 7.9 do not apply to shares and debentures, but do apply to interests in registered managed investment schemes (proposed section 1010A).

14.9 However, there are some requirements in proposed Part 7.9 which do apply to securities:

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requirements in relation to the confirmation of transaction in proposed section 1017F; and

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short selling provisions in proposed section 1020B.

14.20 Apart from those provisions, securities will continue to be subject to the disclosure obligations in Chapters 6CA (continuous disclosure provisions) and 6D (fundraising provisions) of the proposed Corporations Act.

14.21 There are also other provisions which only apply in respect of certain products including:

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requirements in relation to ongoing disclosure of material changes and significant events will not apply to managed investment products (proposed section 1017B). Managed investment products will continue to be subject to the continuous disclosure which are now to be contained in Chapter 6CA of the proposed Corporations Act;

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periodic reporting requirements will only apply to products with an investment component (proposed section 1017D);

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cooling-off periods will only apply to risk insurance products, investment life insurance products, managed investment products, RSA products and certain prescribed superannuation products (proposed Division 5).

14.22 These provisions and the reasons for their more limited coverage are discussed in greater detail below.

Products issued in the course of a business

14.23 To ensure that one-off or private transactions in relation to financial products do not have to comply with the disclosure and other requirements, the provisions will only apply to financial products that are issued, or will be issued in the course of a business of issuing financial products (proposed subsection 1010B(1)). However an initial public offering of interests in a registered managed investment scheme, even if done on a one-off basis, will be regarded as the issue of a financial product in the course of a business of issuing financial products (proposed paragraph 1010B(2)(a)). This contrasts with the approach taken in relation to financial services licensing, where the view is taken that a company issuing its own shares would not be regarded as being engaged in a financial services business, and would not therefore be required to be licensed.

14.24 Similarly, to ensure that not for profit superannuation funds which might not otherwise be regarded as being in the business of issuing financial products are subject to the disclosure requirements, the issue of any superannuation product is taken to occur in the course of a business of issuing financial products (proposed paragraph 1010B(2)(b)).

Which clients do the provisions apply to

14.25 As a general rule proposed Part 7.9 will only apply in relation to dealings with retail clients (see discussion of definition of retail client in Part 6 of this Explanatory Memorandum). That is, PDSs and other disclosure documents will only be required to be given to retail clients. The only exceptions to this general rule are the requirements in relation to the handling of client money in proposed section 1017E and the prohibition on short selling in proposed section 1020B.

14.26 In some of respects this may involve a narrowing of existing legislative requirements. For example, the current provisions in Chapters 7 and 8 of the Corporations Law dealing with the confirmation of transactions (sections 842 and 1206) are not limited in their application to a particular class of clients, but apply to all transactions. Similarly, the Customer Information Brochure requirements under Life Insurance Circular G.I.1 are not limited to particular types of persons.

14.27 Although the proposed legislative provisions only apply in relation to retail clients, this would not prevent people from complying with them in relation to all clients if they so wished.

Product Disclosure Statements

14.28 Division 2 of proposed Part 7.9 deals with point of sale disclosure in relation to all financial products other than securities (as defined in proposed section 761A). The broad objective of point of sale disclosure obligations is 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.

14.29 However, there is considerable debate as to the most effective way of achieving this objective. Often there are tensions between the desire to give consumers all the information they require to make a decision and the need to ensure that consumers can, and do, read and understand the information given to them. This debate is reflected in the range of existing point of sale disclosure requirements. At one end of the spectrum is the due diligence approach adopted in section 710 of the existing Corporations Law in relation to securities, which requires the disclosure of all information that investors and their professional advisers would reasonably require to make an informed assessment of the rights and liabilities attaching to the securities and the assets and liabilities, financial position and performance, profits and losses and prospects of the body offering the securities. At the other end of the spectrum is the Key Features Statement approach adopted in relation to superannuation reflected in a determination under section 153 of the SIS Act which requires disclosure under specific headings.

14.30 The provisions adopt a mid-way approach between these two extremes requiring disclosure in a PDS against a specific list of items in so far as those items are relevant to the particular product being offered to aid comparability of products. Disclosure is also required of any other material information known to the product issuer and not required to be disclosed under a specific head which might reasonably influence a clients decision to acquire the product to ensure as far as possible that consumers have all relevant information to assist their decision making. Unlike section 710 of the existing Corporations Law, this is not intended to require product issuers to undertake a due diligence exercise to discover all material information.

14.31 The provisions also seek to achieve regulatory neutrality as between the competing investment vehicles of managed investments, superannuation and the investment components of life insurance. This is achieved by taking managed investments out of the fundraising provisions of the existing Corporations Law and subjecting them to the same directed disclosure requirements as superannuation and the investment components of life insurance.

Geographical coverage

14.32 The proposed provisions adopt the approach of the fundraising provisions of the existing Corporations Law (subsection 700(4)) of applying the PDS requirements to offers or recommendations that are received within the jurisdiction (proposed section 1011A). Thus the provisions could potentially apply to offers or recommendations included on the Internet in any jurisdiction if they are accessible by persons in Australia and could be regarded as being received in Australia.

14.33 In relation to the fundraising provisions of the Corporations Law, ASIC has released a policy statement (ASIC Policy Statement 141) indicating when it will regard Internet offers as being received in the jurisdiction. That policy statement indicates that ASIC will not regulate offers, invitations and advertisements of securities that are accessible in Australia on the Internet if:

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the offer, invitation or advertisement is not targeted at persons in Australia;

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the offer or invitation contains a meaningful jurisdictional disclaimer;

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the offer, invitation or advertisement has little or no impact on Australian investors; and

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there is no misconduct.

14.34 Jurisdictional disclaimer in this context means making it clear that the offer or invitation is only available to residents of certain countries, not including Australia, or that it is not available to Australians.

When is a Product Disclosure Statement required to be given

14.35 Proposed Subdivision B of Division 2 seeks to require the giving of a PDS at the earliest possible time when a retail person is considering the acquisition of a financial product. Broadly, there are three situations in which a PDS is required to be given:

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when personal advice recommending a particular financial product is made;

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when an offer of a financial product for issue is made, when a person offers to acquire a financial product by way of issue or when the product is issued;

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in certain limited circumstances, when a financial product is offered for sale or when a person offers to acquire a product by way of transfer.

Recommendation situation

14.36 A PDS will be required to be given when a regulated person (as defined by proposed section 1011B) provides personal advice to a retail client which includes a recommendation that the client acquire a particular financial product (see proposed subsection 1012A(3)). Personal advice is defined in proposed subsection 766B(3).

14.37 Generally the provision will only apply to recommendations that a person acquire a product by way of issue, rather than by way of transfer. However, to the extent that sales of financial products require the giving of a PDS under proposed section 1012C, personal advice recommending the acquisition of a product in those circumstances will also require the giving of a PDS (proposed subparagraph 1012A(3)(b)(ii)).

Issue situation

14.38 Generally the requirement to give a PDS will only apply on the initial issue of a financial product and not on the subsequent sale of the product. Issue is defined inclusively in proposed section 761E as:

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a person becoming a member of a superannuation fund;

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the opening of a RSA;

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in relation to a derivative, entering into the legal relationship that constitutes the financial product. This would capture both sides of a derivatives transaction, both the acquisition and the writing or selling of a derivative.

14.39 It would also encompass:

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the opening of a bank account;

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entering into a contract of insurance;

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taking up an interest in a managed investment scheme; and

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making further contributions to a superannuation fund.

14.40 Regulations may also further elaborate on the meaning of issue (proposed subsection 761E(7)).

14.41 The requirement to give a PDS will arise in three circumstances associated with the issue of a financial product:

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when a person makes an offer to issue, or arrange for the issue, to a retail client of a particular financial product. This is intended to cover the circumstance where a product issuer or financial services licensee offers a particular financial product to a person, including for example direct marketing campaigns (see proposed subsection 1012B(3));

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when a product is issued to a person in circumstances where it is reasonable to believe that the person has not received a PDS. This is intended to cover the situation where there is no offer to issue or acquire at all or where the offer is made to or by a person other than the person to whom the product is issued. For example, in relation to some superannuation products, the offer to issue may be made to the employer while the product is issued to the employee. It is intended that in this circumstance the employee receive a PDS prior to the issue of the product (subject to special timing requirements for certain superannuation products provided for in proposed section 1012F) (proposed subparagraph 1012B(3)(a)(iii)); or

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when a retail client makes an offer to acquire a financial product. This is intended to cover situations where a person approaches a product issuer or a financial services licensee seeking a particular financial product. For example, when a person approaches a bank seeking to open a bank account or telephones an insurance company wishing to take out a particular insurance policy (proposed subsection 1012B(4)).

14.42 The term offering to issue is defined broadly, along the lines of existing section 700 of the Corporations Law (as inserted by the CLERP Act), to include inviting applications for issue (proposed paragraph 1010C(2)(a)).

Sale Situation

14.43 There will, however, also be a limited range of secondary sale situations in relation to which there will be an obligation to give a PDS. These provisions are modelled on the anti avoidance provisions in current section 707 of the Corporations Law (as inserted by the CLERP Act). While it is envisaged that these provisions will largely only have application to the secondary sale of interests in registered managed investment schemes, they will have the potential to apply across the full range of financial products in relevant circumstances.

14.44 The sale situations that are covered by the proposed provisions are:

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off-market sales by controllers (as defined in section 50AA of the proposed Corporations Act) (proposed subsection 1012C(5));

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sales within 12 months of issue that amount to an indirect issue (proposed subsection 1012C(6)); and

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off market sales within 12 months of sale by controllers that amount to an indirect issue (proposed subsection 1012C(8)).

14.45 A sale will be regarded as an indirect issue if the product is sold with the purpose of the person to whom it is sold on-selling it or granting, issuing or transferring interests in, or options or warrants, over it. A sale within 12 months will be regarded as having this purpose and therefore amounting to an indirect issue unless the contrary is proved (proposed subsections 1012C(7) and (9)).

Group financial products

14.46 Product issuers will also be required to ensure as far as reasonably practicable that prospective beneficiaries under group financial products, such as group insurance products, receive a PDS before they elect to be covered by the product. Proposed section 1012H has been modelled on the effective purchasing decision approach in the Choice of Superannuation Funds (Consumer Protection) Bill.

Employer-sponsors of superannuation funds

14.47 Proposed section 1012I brings within the FSR Bill the requirements in the SIS and RSA Acts to provide employers with information about superannuation and RSA products that they are applying for on behalf of their employees.

Exceptions to the requirement to give a Product Disclosure Statement

Client has already received a PDS

14.48 As there are a number of trigger points for the requirement to give a PDS which may occur at different stages of a transaction to acquire a financial product, there is the potential for a client to receive a number of PDSs in relation to the same financial product. For example, a client may receive advice in relation to a particular product and receive a PDS at that time, then at some later time could seek the product from the issuer and potentially receive a further PDS.

14.49 This situation is addressed in proposed subsection 1012D(1) which provides that a PDS need not be given if a client has already received an up-to-date PDS or the regulated person reasonably believes that this is the case. However, if there has been a material change in the information that was contained in the PDS which would require the giving of a new or supplementary PDS, the fact that the person has already received an outdated PDS does not obviate the need to give them a new or supplementary one (see discussion of supplementary Product Disclosure Statements below).

Client already holds product and has access to up to date information

14.50 Where a person already holds a financial product and they are seeking to acquire or are being advised to acquire a product of the same kind they will not need to be given a further PDS if they have received or have access to all the information that a PDS would be required to include through an earlier PDS and any ongoing disclosures, periodic reports or, in relation to managed investment products, through continuous disclosure under proposed Chapter 6CA (proposed subsection 1012D(2)). Access to in this context is intended to mean that the person knows of their right to obtain the information and it is reasonably likely that they will have exercised that right. Generally it would apply to information that is generally available in the public arena. It is not intended to encompass the fact that a person could have obtained the information if they had asked for it if it is not widely known by reasonable retail clients that such information can be obtained on request.

14.51 The provision is intended to cover situations where it would be inappropriate to provide a person with a further PDS because they are already aware, through their existing holding of a product of the same kind, of all the information the PDS would be required to contain. For example, a person may hold a managed investment product in relation to which they have received a PDS and periodic disclosure and continuous disclosure has been made to the market in a manner accessible to the person. That person may wish to increase the interest they hold in the product. It would be unduly burdensome to both the issuer and the client for a further PDS to be given in such circumstances.

14.52 Proposed subsection 1012D(10) sets out where one financial product is of the same kind for the purposes of this provision.

Offers under distribution reinvestment plans or switching facilities

14.53 Proposed subsection 1012D(3) provides that a PDS is not required to be given to a person who already holds a particular kind of product and is contemplating acquiring more of the product under a distribution reinvestment plan or switching facility. This provision is modelled on subsection 708(12) of the existing Corporations Law (inserted by the CLERP Act) as it relates to managed investments. However, the provision will not be limited to managed investments, but will apply to all financial products that provide such reinvestment plans or switching facilities. The basis for this exclusion is that the client should already have received a PDS in relation to the initial issue of the product and will have received updated information on an ongoing basis under proposed section 1017B.

14.54 Unlike proposed subsection (2) it is not necessary in this case for the regulated person to be satisfied on reasonable grounds that the person has already received or has access to the relevant information. It is assumed that this will be the case in such circumstances.

Additional contributions to an existing product

14.55 A PDS is not required where a person makes an additional contribution to an existing financial product, such as a further deposit to a bank account, a further contribution to a superannuation fund on the same terms as they have done previously and making a further payment under a life insurance investment policy (proposed subsection 1012D(4)).

No consideration to be provided

14.56 A PDS is not required to be given in cases where no consideration is to be paid for the issue or sale of the managed investment product (proposed subsection 1012D(5)). As a general rule, for all other financial products a PDS will be required notwithstanding that no consideration is paid for the product. This approach has been taken on the ground that in relation to financial products other than managed investments there may be an opportunity cost to the person in taking up the free product. If the person had not received the product free they may have chosen to pay for a similar product. It is important that they know the terms and conditions of the product to enable them to make an informed decision in these circumstances. Even if there is no opportunity cost, the person may be subject to ongoing obligations under the product which they should be informed about.

14.57 Additional products may be prescribed by regulations under this provision. The special circumstance of a financial product that is an option being provided for no consideration is dealt with in proposed subsection 1012D(6). In that case both the option and the underlying product must be provided for no consideration to benefit from the exemption.

Takeovers

14.58 A PDS is not required for the issue or sale of an interest in a managed investment scheme or option by way of transfer over a security under a takeover bid under Chapter 6 of the proposed Corporations Act. In such circumstances the offer will be accompanied by a bidders statement which will contain all the necessary information associated with the bid pursuant to section 636 of the proposed Corporations Act (see proposed subsection 1012D(7)). This provision is modelled on subsection 708(17) of the Corporations Law (as inserted by the CLERP Act).

Responsible entity an exempt body

14.59 A PDS is not required in relation to a recommendation or offer where the product being offered is a managed investment product the responsible entity of which is an exempt body. Exempt body is currently defined in section 66A of the Corporations Law and includes bodies such as registered associations, clubs and societies and co-operatives (these provisions were amended by the Financial Sector Reform (Amendments and Transitional Provisions) Act (No. 1) 1999 ).

Interim contracts of insurance

14.60 Proposed subsection 1012D(9) provides that a PDS will not be required to be given in relation to an interim contract of insurance, as defined in subsection 11(2) of the Insurance Contracts Act. However, subject to the exception in relation to the time of giving a PDS discussed below, a PDS will be required to be given prior to the issue of the final contract of insurance. This provision is intended to facilitate the process of issuing interim contracts of insurance (or cover notes) over the phone.

Small scale offerings of managed investment products

14.61 The exemption from the requirement to give a disclosure document in relation to small scale offerings of managed investment products in current section 708 of the Corporations Law is preserved by proposed section 1012E. The provision only applies to managed investment products, but may be extended by regulation to other products. ASIC may make anti-avoidance determinations for the purposes of this provision under proposed section 1012K.

Time for giving the PDS

14.62 The following timing rules are to apply in relation to the giving of the PDS:

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in the recommendation situation the PDS must be given at or before the time the advice is given (proposed subsection 1012A(3)).

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in the issue situation, the PDS must be given either:

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at or before the time a person makes an offer to issue or arrange to issue or issues the financial product (proposed subsection 1012B(3)); or

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where there is a client offer, before the client becomes bound by a legal obligation to acquire the financial product (proposed subsection 1012B(4)).

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in the sale situation the PDS must be given either:

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at or before the time the seller makes an offer to a retail client to sell the product; or

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where there is a client offer, before the client becomes bound by a legal obligation to acquire the financial product (proposed section 1012C).

Exceptions to the timing requirements

Superannuation products

14.63 Consistent with the current requirements in the SIS Act and regulations, the timing requirements for the giving of a PDS may be relaxed for certain superannuation products. In relation to prescribed superannuation products the PDS need not be given prior to the issue of the product, but may be given up to 3 months after the issue of the product (proposed section 1012F). Which products will be prescribed under this provision will depend on the commencement of the proposed choice of superannuation fund legislation. If that legislation has commenced prior to the commencement of the FSR Bill, only those superannuation products in relation to which there continues to be no choice will be prescribed by regulation. If the choice legislation is not in place prior to the commencement of the FSR Bill, generally only public offer superannuation funds will be required to provide disclosure prior to issuing superannuation products.

Risk insurance products

14.64 To facilitate phone issues of risk insurance contracts proposed 1012G provides an exception to the requirement to provide a PDS prior to the issue of certain products that are subject to a mandatory cooling-off. The exception does not apply to products for which an application form is required to accompany the PDS, notwithstanding that they are subject to mandatory cooling-off periods. In such cases the client would always have the PDS prior to the issue of the product as they must apply for it on an application form that accompanies the PDS.

14.65 At present, therefore, the exception would only apply to risk insurance products, as they are the only products that have a mandatory cooling-off period, but are not required to have an application form accompanying the PDS. However the provision has been drafted more generally to capture any other product that might meet the relevant criteria in the future.

14.66 Where proposed section 1012G applies and:

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the client expressly instructs that they want the advice in relation to the product or the product itself immediately or at a specified time; and

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it is not reasonably practicable to give the PDS when it would otherwise have been required to be given;

The PDS must be given to the client as soon as practicable after that time and not later than the start of the cooling-off period.

14.67 The cooling-off period commences on the earlier of:

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the time when confirmation of the transaction is required under proposed section 1017F - which is as soon as is reasonably practicable after the transaction occurs; or

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the end of the fifth day after the day the product was issued (proposed subsection 1019(3)).

14.68 In addition to the requirement to give the PDS prior to the commencement of the cooling-off period, the product issuer or financial service licensee must give the client an oral statement when the PDS would otherwise have been required to have been given that outlines:

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the essential features of the product;

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any significant risks associated with the product;

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the cost and other amounts payable in respect of the product;

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any significant taxation implications; and

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details of the cooling-off period applicable to the product (proposed paragraph 1012G(3)(a)).

Basic deposit products

14.69 The timing exception provided for in proposed section 1012G also applies to basic deposit products and related non-cash payment facilities and any other products prescribed by regulation (proposed paragraph 1012G(1)(b)).

Who must give the Product Disclosure Statement

14.70 The concept of regulated person is defined in proposed section 1011B and includes:

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product issuers and those sellers covered by proposed section 1012C;

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financial service licensees and authorised representatives;

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persons who are not required to hold a financial service licence because they are a member of a declared professional body or because they are exempt from the licensing requirement;

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persons who should be licensed, but for whatever reason are not. Although a person who should be licensed but is not will be subject to penalties for breach of the licensing provisions, they will also be subject to the product disclosure requirements. This will enable a person who has suffered loss or damage as a result of a failure to receive a PDS to recover that loss or damage in a civil action.

14.71 The provisions would not apply therefore to a person giving financial product advice in circumstances where they are not carrying on a financial services. For example, a person giving financial product advice in a voluntary capacity or on a one-off basis would not have to give a PDS in relation to any recommendation to acquire a particular financial product. However, a product issuer would have to give a PDS if the person subsequently acquired the product by way of issue.

Who must prepare the Product Disclosure Statement

14.72 A PDS must be prepared by or on behalf of either the product issuer or the seller in those limited sale situations for which a PDS is required under proposed section 1012C. Proposed section 1013A refers to the person who is required to prepare the PDS as the responsible person.

14.73 Proposed subsection 1013C(4) permits the badging or branding of products with information about persons other than the product issuer. It enables the product issuer or seller to include information about an association with another person. By virtue of proposed subsection 1013A(4) this information could be included by another person on behalf of the product issuer. Any such information must not include anything that might create the impression that the other person is the issuer or seller of the product. This is based on provisions in Life Insurance Circular G.I.1 issued by the former Insurance and Superannuation Commission.

Who is the product issuer

14.74 The concept of product issuer is defined in proposed section 761E. Generally the issuer is regarded as the person who is responsible for the obligations owed under the product to the client or a person nominated by the client. This would mean that the following persons would be regarded as product issuers:

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a financial institution making a deposit account available;

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a responsible entity of a managed investment scheme making an interest in a managed investment scheme available;

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an insurance company accepting a risk under a contract of insurance. Even in those circumstances where a broker or an underwriting agent effectively puts together an insurance product, it is considered that the insurance company would be the product issuer. Where there are a number of insurance companies involved in accepting a risk under a particular contract of insurance it is envisaged that they will be jointly responsible for preparing the PDS. Of course it would be open to the insurance company(ies) to authorise the broker or underwriting agent to prepare the PDS on their behalf. However, the company would be responsible for the PDS.

14.75 In relation to OTC derivative transactions, both parties to the transaction will be regarded as the product issuer by proposed subsection 761E(5). However, the retail/wholesale distinction and the precondition that for the product disclosure requirements to apply a product must be issued in the course of a business of issuing products will generally ensure that at the most only one party is subject to the product disclosure requirements. Where both parties are wholesale, neither will be required to disclose, while if one party is wholesale and the other is retail, only the wholesale party will be required to disclose. In the unlikely event that both parties are retail, the business test may operate to ensure that only one has an obligation to disclose.

14.76 In relation to derivatives that are traded on a market, where a financial service licensee is involved in the transaction, they will be regarded as the issuer and required to prepare the PDS. It would be open to the financial market operator to offer assistance to licensees in preparing the PDS if it so wished, but each licensee would be responsible for the content of the PDS (proposed paragraphs 761E(6)(c) and (d)). Where there is no intermediary involved in a derivatives transaction on a market the market operator will be regarded as the product issuer and responsible for the preparation of the PDS (proposed paragraph 761E(6)(e)). This provision anticipates the possibility that under developments for example in electronic trading systems clients may enter into transactions directly on a market.

14.77 The regulations may provide additional circumstances in which a person may be regarded as a product issuer. The regulations may override the general rules outlined in proposed section 761E.

Who must the product disclosure statement be given to

14.78 Generally, the provisions only require the giving of a PDS to a retail client. Disclosure is required to be given to the person receiving the recommendation or the person receiving or making the offer or to the person to whom the product is issued. As noted above, however, in relation to group financial products, product issuers must take reasonable steps to ensure that prospective group members receive disclosure.

Wrap accounts

14.79 So-called wrap accounts are arrangements under which a number of individual financial products are packaged together with other services and offered to a client. The products are purchased by the wrap account provider (who would be required to hold an AFSL) on behalf of their clients. It is intended that the PDS provisions would require the giving of a PDS to the ultimate purchaser of the product and not just to the wrap service provider. It is envisaged that the wrap service provider would have to provide the PDS to the client either when they recommend the products or when they arrange for the issue of the products to the client.

Content of Product Disclosure Statement

14.80 As noted above, a directed disclosure approach to point of sale disclosure is outlined in the provisions. That approach seeks to balance the need for the purchaser to have sufficient information to make an informed decision and compare products against the concern that they may be provided with more information than they can comprehend. In doing so, it takes a middle ground between the full due diligence approach in the fundraising provisions of the Corporations Law and the Key Features Statement approach taken in relation to superannuation. That is, the provisions take a directed disclosure approach supplemented by other information known to the issuer or seller that might materially influence a retail clients decision to acquire the product.

14.81 The other key feature of the approach taken is that it has been drafted in such a way that it is capable of applying flexibly across the full range of financial products that are subject to the regime. It is envisaged that a PDS for a banking product will be very different from a PDS for a managed investment product in terms of the detail provided. However, there will, through the directed disclosure approach, be sufficient similarity between the documents to enable a consumer to compare them if they so wish.

14.82 This flexibility is achieved in a number of ways:

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the level of information required to be included under a particular topic varies according to the particular product in question. Only the level of information that a retail person would reasonably require for the purpose of making a decision whether to acquire that product needs to be included (see proposed subsection 1013D(1)). This requirement should be read as limiting, not expanding, the disclosure obligation;

•

if a particular topic is not relevant to a particular product it need not be included. For example, if there are no significant risks associated with the holding of a particular product, which might be the case in relation to a capital guaranteed banking product, then nothing needs to be included in relation to risks (proposed subsection 1013D(3));

•

information only needs to be included in the PDS to the extent that it is reasonable for a person considering whether to acquire the product to expect to find the information in the PDS (proposed section 1013F). Therefore things that are general knowledge and that a reasonable person would not expect to find in a PDS would not have to be included in the PDS. Again, the requirement to provide information that a person would expect to find in the PDS is intended to limit, not expand, the disclosure obligation;

•

the list itself is cast in fairly general terms, with the capacity for the information that must be included under particular heads in relation to particular products to be fleshed out in a number of ways:

-

through a regulation making power (see proposed subsection 1013C(4));

-

under an industry code of conduct which may be approved by ASIC (proposed section 1101A);

-

Through ASIC guidance in the form of policy statements.

Directed disclosure

14.83 Proposed section 1013D contains the list of topics that must be included in all Product Disclosure Statements, to the extent that they are relevant to the particular product. It distinguishes between statements and information. In relation to statements all relevant information must be included, for example, the name and contact details of the product issuer. In relation to information, however, only such information under the particular item as a retail person would reasonably require for the purpose of making a decision whether to acquire the financial product needs to be included in the PDS. This will vary from product to product and allow for flexibility in the detail that is to be included under each topic. In addition information need only be included to the extent that it is within the actual knowledge of the persons described in proposed subsection 1013C(2). Unlike the current fundraising provisions of the Corporations Law a full due diligence inquiry is not required by these provisions.

14.84 The topics under which statements or information must be included in the PDS are as follows:

Name and contact details

14.85 For all PDSs this will be the name and contact details of the product issuer. In addition, in sale situations, the name and contact details of the seller are required to be included.

Benefits

14.86 Proposed paragraph 1013D(1)(b) requires disclosure of any significant benefits to which the holder of the product will or may become entitled and the circumstances in which or the time at which those benefits will or might be provided. This would mean, for example, the disclosure of:

•

the interest rate on a bank account;

•

the payment of a claim under an insurance contract; or

•

the payment of an entitlement by a superannuation fund and the circumstances in which that entitlement is to be paid. It would encompass the kinds of information required to be disclosed under clauses 37-39 of the determination made under section 153 of the SIS Act.

Risks

14.87 The PDS must include information about any significant risks associated with the holding of the product. If there are no significant risks, nothing needs to be disclosed under this head. In other cases, the level of detail of disclosure of risks will depend on what a retail person would reasonably require to make a decision to invest in the product. However, information does not need to be included if it would not be reasonable for a person to expect to find that information in the PDS, for example, because it is common knowledge (proposed section 1013F).

14.88 It is envisaged that current disclosures in the IABA in relation to unauthorised foreign insurers would be disclosed here.

Amounts payable

14.89 Proposed paragraph 1013D(1)(d) deals with disclosure of information about amounts that the purchaser of the product must pay.

14.90 To the extent that there is a known upfront price for the purchase of the product, the PDS must include this information. However, for many products this may depend on the particular circumstances of the client, such as in the case of a risk insurance product, or how much the client wishes, for example, to invest in a product or to deposit in a bank account. In these cases, the PDS will not have to include such information, but the person will receive confirmation of the amount of the transaction through the confirmation process outlined in proposed section 1017F.

14.91 The PDS must also include information about any other amounts a holder of the product will or may have to pay in respect of the product, and the times at which those amounts will or may be payable. This would include, for example, entry and exit fees (proposed subparagraph 1013D(1)(d)(ii)). To the extent that fees and charges are deducted from a persons holding in a product (proposed subsection 1013D(2)) or from the overall fund they will also be required to be disclosed (proposed subparagraph 1013D(1)(d)(iii)).

14.92 The provisions do not require the inclusion of a single figure that is indicative of the impact of all fees and charges on a product. Such an approach has not been adopted for two major reasons:

•

the calculation of such a single figure requires the making of a range of assumptions, such as the estimated return on the product over a number of years and the length of time the person holds the product. In consequence, the figure may have little relevance to the circumstances of a particular consumer and in some respects may be misleading; and

•

there is no industry consensus on whether the figure should be calculated on a time or money weighted basis.

14.93 If it were thought appropriate to provide for a single figure for a particular product or class of products, this could be done through regulations or via an industry code of conduct.

Commissions

14.94 The purpose of commission disclosure at point of sale of the product is to enable the client to assess the likely return on the product. In order to do this, proposed paragraph 1013D(1)(e) requires commissions, or other similar payments, to be disclosed to the extent that they will ultimately impact on the return that the holder of the product will receive.

14.95 Where the commission paid does not affect the return from a product, no disclosure is required. The amount of commission will, however, be reflected in the fees, charges paid by the consumer and disclosed under proposed paragraph 1013D(1)(d). So, for example, commission will not need to be disclosed as a stand-alone item (that is, distinct from the amounts paid by the client to buy the product) for most risk insurance and other non-investment products where the commission does not impact on the return from the product. For the most part, when a consumer purchases a risk insurance product they pay a premium in order to insure against a future risk. If and when that future risk eventuates the consumer will receive the amount for which they were insured. Even though the premium the consumer pays includes a portion that will ultimately be paid to the financial service provider as commission, the payment of the commission will not affect the amount paid if the event occurs.

14.96 It is envisaged that to the extent possible the quantum of commission will need to be disclosed where it impacts on the return on the product. This disclosure will be required to be specified as a dollar amount or as a percentage of the amount paid. Where disclosure in this format is not possible, a written description will be required. This will be prescribed by way of regulations.

Any other significant characteristics or features

14.97 In addition to the matters outlined above, the PDS will have to include information about any other significant characteristics or features of the product, or of the rights, terms, conditions and obligations attaching to the product (see proposed paragraph 1013D(1)(f)). This would include, for example, information about preservation requirements in relation to superannuation and information about margining requirements in relation to derivatives.

Dispute resolution

14.98 The PDS will be required to include information about the internal and external dispute resolution procedures that are available to deal with complaints by holders of the product and about how those procedures may be accessed. Proposed paragraph 912A(1)(g) and proposed section 1017G require financial service licensees and product issuers who are not licensees respectively to have internal and external dispute resolution procedures to resolve complaints from people who receive financial services or acquire financial products. Those dispute resolution procedures must be ones approved by ASIC in accordance with the regulations.

Taxation implications

14.99 The PDS must include information about any significant taxation implications of the product that are specific to that kind of financial product. This is intended to pick up only those taxation considerations relevant to particular kinds of products and not those that relate to the particular clients circumstances. For example, the fact that taxation will be paid at the persons normal marginal personal income tax rate on a return from a product is not something that would be required to be disclosed. However, the particular taxation treatment of superannuation products is something that would be required to be disclosed.

14.100 It is not intended that the provision require the detailed disclosure about the operation of taxation laws, but rather that it require the identification of the features of the product that have particular taxation implications.

Cooling-off arrangements

14.101 Disclosure is required of both mandatory and voluntary cooling-off arrangements applying to financial products. Proposed sections 1019A and 1019B provide for mandatory cooling-off in relation to certain financial products.

Other information

14.102 To the extent that the product issuer or seller makes other information available in relation to the product, the PDS must indicate how that information may be accessed. Proposed section 1017A imposes an obligation on a product issuer or seller to provide further information about a product in certain circumstances.

Other information that might influence a decision to acquire

14.103 As noted above, in addition to the list of items that must be disclosed under proposed section 1013D, disclosure is also required of any other information that is actually known to the product issuer or seller and that might reasonably be expected to have a material influence on the decision of a reasonable retail person to acquire the product (proposed section 1013E). This differs from the approach taken in the current fundraising provisions of the Corporations Law in two respects:

•

it only requires disclosure of information actually known to the product issuer or seller. Section 710 of the Corporations Law also requires disclosure of information that in all the circumstances the issuer ought reasonably to have obtained by making inquiries. It is this element of section 710 that gives rise to the due diligence obligation; and

•

only the information requirements of retail persons, and not also their professional advisers, need to be taken into account.

14.104 Proposed subsection 1013C(2) outlines whose knowledge is relevant in terms of the additional information that must be included in the PDS. It is modelled on subsection 710(3) of the Corporations Law (as inserted by the CLERP Act) and, in addition to the product issuer and seller and their directors, includes:

•

an underwriter of the issue or sale of the product;

•

financial service licensees who participated in the preparation of the PDS;

•

persons who have consented to the inclusion of a statement in the PDS; and

•

persons who are named in the statement as having performed a particular professional or advisory function in relation to the issue of the product.

14.105 The limitation on the extent to which information is required to be included in a PDS under proposed section 1013F will ensure that the field of knowledge of such persons is not unduly broad. If it would not be reasonable for a retail client to expect to find the information in the PDS it need not be included.

14.106 However, a person will only be civilly liable for a defective PDS if they are involved in the preparation of the PDS and have caused it to be defective (proposed subsection 1022B(3)).

Need not include if would not expect to find in PDS

14.107 As noted above, information need not be included in the PDS if it would not be reasonable for a retail person considering whether to acquire the product to find the information in the statement (see proposed section 1013F). For example, it may not be reasonable to expect to find a statement in a PDS that ADIs are prudentially regulated. This is based on paragraph 710(1)(a) of the Corporations Law (as inserted by the CLERP Act). Proposed subsection 1013F(2) sets out a range of factors that may be taken into account in assessing whether it would be reasonable for a person to expect to find information in the PDS.

Other information that must be included in PDS

Dating

14.108 To assist regulated persons in determining whether a client has received an up-to-date PDS, the PDS must be dated. This is either the date the PDS is lodged with ASIC (see discussion of lodgment below) or the date when the preparation of the PDS is completed. Special dating requirements apply in relation to PDSs that are contained in more than one document (proposed subsection 1013L(5)).

Products traded on a financial market

14.109 If a PDS indicates that the financial product is to be traded on a financial market, further information must be included in the PDS indicating either that the product is able to be traded or that steps have been taken to ensure that it will be able to be traded (proposed section 1013H). This provision is modelled on subsection 711(5) of the Corporations Law (as inserted by the CLERP Act).

Statement in relation to lodgment

14.110 If the PDS is required to be lodged with ASIC (see discussion below), a statement to this effect and indicating that ASIC is not responsible for the content of the document must be included in the PDS (see proposed section 1013J).

Statements made by persons in the PDS

14.111 The provisions envisage that the PDS may include statements that are attributable to particular people, for example auditors. However, such statements may only be included if the person to whom they are attributed has consented to the inclusion of the statement in the form and context in which it is included in the PDS (proposed section 1013K).

PDS may consist of two or more documents

14.112 The provisions do not permit material to be incorporated in the PDS by reference along the lines of the approach taken in relation to disclosure documents under the fundraising provisions of the Corporations Law on the basis that it is envisaged that the PDS will be a much shorter document than a prospectus and should not require detailed material to be incorporated by reference. The view has been taken that the PDS should on its face contain all the material information that a retail person would require to make a decision to acquire the product and that they should not have to seek additional material information that is necessary for them to make a decision.

14.113 The provisions will not prevent additional information that may assist a person or their financial services adviser in making a decision, but that is not material to the decision making process of the retail person, being included in the PDS or being incorporated into the PDS by reference (see proposed paragraph 1013C(1)(b)).

14.114 Although the provisions do not provide for incorporation by reference, they do address one of the concerns that incorporation by reference is intended to address. It is recognised that certain information that is required to be included in a PDS may be susceptible to frequent change, such as the return on the product or other financial information, making it difficult to maintain an up-to-date PDS. In addition there may be generic information that applies to a number of products which it would be burdensome to individually include in all PDSs. Proposed section 1013L addresses this by allowing a PDS to consist of two or more documents that must be given at the same time. Thus a PDS may consist, for example, of one document containing core product information that is unlikely to change, another document containing performance information that may change annually and a further document including information about fees and charges that may be subject to change more frequently.

14.115 Provided these documents make clear what the whole package of documents making up the PDS is and they are handed over to the client at the same time they will be regarded as a single PDS.

Updating the Product Disclosure Statement

14.116 No limit is to be placed on the time a PDS can remain current. However, where a document becomes out of date, the product issuer or seller must either:

•

In relation to new recommendations or offers:

-

withdraw the PDS and provide a new PDS. This could be done by updating one of the documents that make up the PDS or by using insertions or stickers on an existing PDS - the altered document would be regarded as a new PDS if the alteration was material (proposed section 1015E) ; or

-

supplement the existing document;

-

where applications have already been received pursuant to the old PDS, pursue the procedures outlined in proposed section 1016E for dealing with those applications.

Supplementary Product Disclosure Statements

14.117 Proposed subdivision D outlines the purpose and content of a supplementary PDS. As with the PDS, a supplementary document must include a title, in this case, Supplementary Product Disclosure Statement (which may be abbreviated other than at the front of the document to SPDS) (see proposed section 1014B).

Effect of giving Supplementary PDS

14.118 Where a person has a PDS and is given a supplementary PDS, the PDS is taken to include all the information contained in the SPDS (see proposed section 1014D). This provision is modelled on subsection 719(4) of the existing Corporations Law (as inserted by the CLERP Act).

Circumstances where only Supplementary PDS need be given

14.119 Where a person already has an outdated PDS the obligation to give an up-to-date PDS can be satisfied by giving them a supplementary PDS (proposed section 1014E).

Applications received under outdated PDS

14.120 Proposed section 1016E outlines the options that are available to an issuer or seller in dealing with applications that have been received pursuant to a PDS that is outdated. The PDS may be outdated for a number of reasons:

•

a minimum subscription condition has not been met;

•

a statement in relation to the ability of a product to be traded on a financial market has not been met in a specific time frame;

•

the issuer or seller becomes aware that the document contains a misleading or deceptive statement or there is an omission and that statement or omission is materially adverse from the point of view of a retail person; or

•

a new circumstance has arisen which would have been required to be included in the PDS that is materially adverse from the point of view of a retail person.

14.121 The options available to the issuer or seller in those circumstances are either to:

•

repay the money received from applicants;

•

give applicants a supplementary PDS and the opportunity to withdraw their applications; or

•

issue or sell the products to the applicants, but give them a supplementary PDS and an opportunity to return the financial products and be repaid.

14.122 If the issuer or seller fails to exercise any of these options in proposed subsection 1016E(2) the applicant has the right to return the product and have the money they paid to acquire the product repaid (see proposed section 1016F). In these circumstances the applicant has the right to have the full amount of the money they paid for the product repaid. This is in contrast with the position where a right of return under a cooling-off period is exercised. The reason for the difference is that in the case of a defective disclosure document, the applicant has received something different from the description in the PDS. A right to return under a cooling-off period can be exercised even though the PDS accurately described the product and the product issuer was not in breach of any legislative requirement.

14.123 Regulations under proposed subsection 1016F(7) will deal with the special situation of returning products in the context of preservation requirements for superannuation products.

Lodgment of Product Disclosure Statements

14.124 Product Disclosure Statements in relation to managed investment products that are either traded on a financial market or it is intended will be traded will be required to be lodged with ASIC. There will be the facility for regulations to extend the range of products to which the lodgment requirement applies (proposed section 1015B). The provisions will also apply to supplementary PDSs.

14.125 Lodgment will not involve any pre-vetting of the PDS by ASIC. However, a consequence of lodgment is that products, except for those traded on a financial market, cannot be issued or sold until seven days after the PDS is lodged. ASIC will be able to extend the period in which products cannot be issued or sold to 14 days (proposed section 1016B). This provision does not apply to supplementary PDSs and is based on subsection 727(3) of the Corporations Law (as inserted by the CLERP Act).

14.126 For those products for which the PDS is not required to be lodged, the issuer or seller must inform ASIC when they begin to use it and keep a copy of it for seven years and make copies of it available to ASIC and, where reasonable, to others (proposed section 1015D).

14.127 The basis of the distinction between those products for which the PDS is required to be lodged and those for which it must be kept by the product issuer or seller is that the former are likely to be more complex products giving rise to more detailed PDSs. In addition, some of the products for which lodgment is not required may be highly personalised to the particular client and a lodgment requirement could be burdensome.

Electronic commerce

14.128 Consistent with the approach in the fundraising provisions of the Corporations Law (as inserted by the CLERP Act) the proposed provisions will facilitate the issue of a PDS in electronic form as well as paper documents (see for example proposed section 1015C). The regulations may specify requirements for documents to be given in electronic form (proposed paragraph 1015C(5)(b)).

Other obligations that must be met prior to the issue or sale of a product

Application forms

14.129 Certain financial products will not be able to be issued or sold unless the product was applied for using an application form included in or accompanying a PDS or copied or derived from such a form (proposed section 1016A). The products that this provision applies to are managed investment products, superannuation products, investment life insurance products and other products prescribed by regulation. This is consistent with current provisions in the Corporations Law, the SIS Act and the Life Insurance Circular G.I.1.

14.130 In relation to these products, the requirement for an application form included in or accompanying the PDS is one way of enabling the product issuer or seller to satisfy their obligations to ensure that the applicant has received an up-to-date PDS prior to the issue of the product.

14.131 While application forms will not be required in relation to other products, it will be open to product issuers to use application forms if they so wish. Any application form used would, of course, be subject to the general prohibition on misleading and deceptive conduct.

Minimum subscription conditions

14.132 Proposed section 1016C, which is modelled on subsection 723(3) of the Corporations Law (as inserted by the CLERP Act), requires any minimum subscription condition attaching to a financial product to be satisfied prior to the issue or sale of the product. In the event that the condition is not satisfied and the issuer or seller still wishes to issue or sell the product, it would be open to them to modify the PDS through a supplementary statement.

Condition about ability to trade

14.133 Proposed section 1016D permits the issue or sale of a product in relation to which there is a statement that it will be able to be traded on a financial market only if the product is able to be traded on that market or an application has been made within the relevant time frame for it to be traded. If such an application has not been made or the product is not able to be traded within 3 months any issue of the product is void and the issuer must return any money paid.

Additional information on request

14.134 A product issuer or seller who has prepared a PDS will be required to provide certain additional information about the product on request to a person (proposed section 1017A).

What additional information

14.135 Information need only be given on request if:

•

it has previously been made generally available to the public;

•

it might reasonably influence the decision of a retail person whether to acquire the product; and

•

it is reasonably practicable to give the information (proposed subsection 1017A(2)).

14.136 The requirement that the information has previously been made generally available to the public means that a range of confidential information, such as trade secrets or information subject to a duty of confidence, does not need to be disclosed. It also means that information that has been made available to a more limited class of persons, for example in a briefing for financial service licensees, does not have to be provided under this proposed section.

To whom must additional information be provided

14.137 The proposed provision enables the following people to request such information:

•

any person who has been given or has obtained a PDS in relation to the product who is not a holder of the product.

•

professional advisers such as financial services licensees and their representatives. However, it can only be such information as might reasonably influence the decision of a retail person to acquire the product.

Time of giving of information

14.138 The information must be given as soon as practicable and must make reasonable efforts to comply within one month of the request.

How information is to be given

14.139 Proposed subsection 1017A(4) deals with how information may be given. It is based on provisions in the Superannuation Industry (Supervision) Regulations.

Charge for the giving of information

14.140 A product issuer or seller may charge for the giving of additional information. They may only charge the reasonable cost associated with the giving of the information (proposed subsections 1017A(5) and (6)).

Ongoing disclosure

14.141 Proposed section 1017B establishes a regime for ongoing disclosure of information in relation to products for which a PDS is required. It does not apply, however, to managed investment products. They will continue to be subject to the amended continuous disclosure obligations in proposed Chapter 6CA. This was done on the basis that the continuous disclosure provisions were better able to address ongoing disclosure obligations in relation to listed managed investments and having regard to the fact that the rules of financial markets would impose continuous disclosure obligations for such products in any case.

What must be disclosed

14.142 Disclosure is required where there is a material change to or a significant event affecting any of the information that was required to be included in the PDS. Information that is reasonably necessary for the holder to understand the nature and effect of the will have to be disclosed.

To whom must ongoing disclosure be made

14.143 Ongoing disclosure is required to be given to a person who was a retail person when they acquired the product and who was given or obtained or should have been given a PDS for the product. Thus if the person was wholesale when they acquired the product they are not entitled to ongoing disclosure.

How is ongoing disclosure to be made

14.144 Ongoing disclosure may be provided in writing, electronically or in a way specified in the regulations. This would enable, where appropriate, the specification in regulations of alternative methods of notice, such as, for example, advertisements in national newspapers.

When is ongoing disclosure required to be given

Change or event not relating to fees or charges

14.145 If the change or event is adverse to the holders interests it must be disclosed:

•

before the change or as soon as reasonably practicable after it;

•

in any case, within three months after the change.

14.146 If the change or event is not adverse to the holders interest it must be disclosed no later than 12 months after the change. For financial products with an investment component, such changes could be notified in a periodic statement required to be given under proposed section 1017D.

Change or event relating to fees and charges

14.147 Changes or events relating to fees and charges must be notified 30 days before it takes effect. requirement.

Information to existing holders of superannuation and RSA products

14.148 Proposed section 1017C brings across from the SIS Regulations the annual member information requirements. The fund information requirements will also be brought across in subsequent consequential amending legislation.

Periodic Statements

14.149 Proposed section 1017D establishes a regime for periodic reporting in relation to financial products that have an investment component. It will apply to managed investment products, superannuation products, RSA products, investment life insurance products, deposit products and any other product prescribed by regulation.

Reporting periods

14.150 The maximum reporting period is 12 months. However it will be open to a product issuer to provide for more frequent reporting if they so wish. The first reporting period starts when the product is issued to the holder.

14.151 It would be open to product issuers to end the reporting period at the same time for all holders, so that they report on the same date for all holders. This would mean that for new holders they might have a shorter reporting period at the first reporting date than they will have for subsequent reporting periods. For example, a product issuer may report to holders annually for the period from 1 July to 30 June. If a holder purchased the product on 30 September, it would be open to the product issuer to report for that holder for the period 30 September to 30 June (proposed subsection 1017D(2)).

14.152 Subsequent reporting periods will commence at the end of the preceding reporting period.

When the periodic statement must be given

14.153 A periodic statement must be given within 6 months of the end of the reporting period (proposed subsection 1017D(3)).

Content of periodic statement

14.154 Generally the periodic statement must include information that a holder needs to understand their investment. Proposed subsection 1017D(5) provides an indicative list, so far as they are relevant, of things that must be included in the periodic statement. Additional items may be prescribed by regulation.

Holding of application money

14.155 Proposed section 1017E imposes an obligation on product issuers and sellers who are required to prepare a PDS to hold any application money in an account for the applicant until the product is issued or transferred or the money returned. Regulation making powers are included to provide for situations where it is not possible either to return the money or issue the product, for example, because the applicant can not be identified.

Confirmation of transactions

14.156 As a general rule the issuer of a financial product will be required to confirm any transactions by a retail client in relation to that product. Confirmation must be effected as soon as reasonably practicable either by:

•

confirmation by the product issuer; or

•

establishment of a facility enabling the client to confirm for themselves. The client must consent to the use of such a facility to satisfy the confirmation requirements (proposed section 1017F).

14.157 There are a number of exceptions to this general rule:

•

in a sale requiring the preparation of a PDS the seller will be required to confirm the sale;

•

in relation to a disposal of a financial product, the regulations may prescribe who is to confirm the transaction. Where a financial service licensee is involved in the disposal of a product on behalf of a retail client, it is envisaged that the licensee will be responsible for confirmation;

•

more generally, there will be a regulation making power through which someone other than the product issuer may be required to confirm a particular class of transactions instead of the product issuer. It is intended that provisions similar to the contract note provisions in sections 842 and 1206 of the existing Corporations Law and the regulations made for the purposes of those provisions will be included in the regulations, placing the obligation on a financial services licensee who effects a transaction on a financial market on behalf of a retail client to confirm the transaction;

14.158 Confirmation will not be required in relation to a number of transactions including:

•

additional contributions towards a financial product, the timing and amount of which, or the method of calculating the amount of which, was agreed when the product was entered into or are necessary as a result of some external factor such as an increase in a persons salary or the Superannuation Guarantee rate;

•

a variation of the rights attaching to a security. Such changes require the approval of shareholders in any case;

•

a range of transactions in relation to deposit accounts which do not involve a direct interface with the client, such as crediting interest, withdrawals as a result of direct debit arrangements and debiting fees and charges. The client will be informed about these transactions in the periodic statement (proposed subsection 1017F(4));

14.159 As noted above, the confirmation provisions will apply to all financial products including securities. They will, however, only apply to transactions involving retail clients.

Content of confirmation

14.160 Confirmation must give the client such information as they need, having regard to the information they have received before the transaction, to understand the nature of the transaction (proposed subsection 1017F(7)). Thus the confirmation need not repeat information that was contained in the PDS.

14.161 In particular, the confirmation must include details of:

•

the issuer or seller;

•

the date and description of the transaction;

•

any amount payable by the holder in relation to the transaction. The regulations will deal with the situation where the precise costs of the transaction are not known at the time of confirmation. This may arise, for example, because certain fees and charges are calculated on the basis of the number of transactions performed in a specific period;

•

any taxes and stamp duties payable in relation to the transaction. Similarly, the regulations will address the situation where the exact amount of taxes and stamp duties are not known at the time of confirmation; and

•

any other matters prescribed by the regulations (proposed subsection 1017F(8)).

Alternative Dispute Resolution

14.162 The financial service licensee provisions require licensees to have both internal and external dispute resolution mechanisms approved by ASIC. While many product issuers will be financial services licensees as they are issuing their own products, some product issuers may distribute their products indirectly through licensees, rather than through their own employees and authorised representatives. Such product issuers will not be required to be licensed. However, they will be required under proposed section 1017G to maintain internal and external dispute resolution procedures approved by ASIC to resolve complaints in relation to alleged contraventions of Part 7.9. Product issuers will not be required to have dispute resolution mechanisms to cover complaints about the product as distinct from disclosures in relation to the product. They may, however, wish to extend their dispute resolution mechanisms to such complaints.

14.163 The same approval criteria as envisaged for the financial service licensee provisions will apply in relation to product issuer dispute resolution mechanisms.

14.164 ASIC will be given power to issue a stop order to prevent a product issuer from distributing its products if it does not have and maintain approved dispute resolution processes.

Advertising and promotional material

14.165 Financial products, other than securities, will be able to be advertised and promoted both before and after the issue of PDSs. The advertisement or promotional material will, however, be required to include certain information where it advertises a particular product or is reasonably likely to induce people to acquire the product. That is, where it is more than image advertising.

14.166 Unlike the existing provisions in relation to securities in subsection 734(3) of the Corporations Law (as inserted by the CLERP Act) proposed section 1018A does not list any factors to be taken into account in determining whether particular advertising is merely image advertising or is reasonably likely to induce people to acquire the product. It will be a question of fact in each case whether particular advertising is reasonably likely to induce people to acquire the product. While the factors in subsection 734(3) are relevant for securities in relation to which there is generally a distinction between the issuing of securities in a company and the core business of the company, for the wider range of financial products covered under proposed section 1018A the issuing of financial products is in fact the core business of the issuer. Thus the factors in subsection 734(3) are less helpful in determining whether particular advertising is mere image advertising.

14.167 The information that the advertisement or promotional material is required to include is:

•

the identity of the product issuer;

•

either that a PDS is available and where it can be obtained or that it will be made available when the product is released;

•

that a person should consider the PDS before making a decision whether to acquire the product.

14.168 There is a range of exceptions to the requirement to include this information which are based on those contained in the Corporations Law modified to reflect the wider range of products to which the provisions will apply.

14.169 There is a specific exception for publishers who publish advertisements in the ordinary course of a media business. This has been extended to electronic media businesses. However, it is not intended to generally exclude advertising on the Internet from the scope of the provisions (proposed paragraph 1018A(6)(c)).

Cooling-off periods

14.170 A 14 day cooling-off period will apply to the following range of financial products where those products are acquired by retail clients:

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risk insurance products (both general and life);

•

investment life insurance products;

•

managed investment products;

•

superannuation products of a kind prescribed by regulations;

•

RSA products

(Proposed sections 1019A and 1019B)

14.171 A retail client who acquires a product of this kind will have a right to return the product to the person who issues the product, or in the limited circumstances described in proposed section 1012C sells the product, to the client. On return of the product, the money paid to acquire the product must be repaid to the client. In various circumstances described in below, the money repaid to the client will vary from the money paid to acquire the product.

Commencement of the cooling-off period

14.172 The 14 day cooling-off period will start on the earlier of:

•

the time when the confirmation requirement in section 1017F is complied with; or

•

the end of the fifth day after the day on which the product was issued or sold to the client

14.173 The second timing element, the fifth day after the product was issued, has been included to cover circumstances in which either there is no requirement for confirmation in relation to a product to which a cooling-off period applies or there is a confirmation requirement but the confirmation requirement has not been complied with.

14.174 The commencement of the cooling-off period is also relevant in relation to the timing exceptions for the giving of Statements of Advice and PDSs in relation to products to which a cooling-off period applies.

Calculation of the money to be repaid to the retail client

14.175 It is proposed that regulations will be made to cover the following circumstances:

•

where the value of the product is linked to the market;

•

where a tax has been paid by the issuer in respect of the product and that tax is not recoverable, or that tax has not been paid but does not cease to be payable.

Market linked products

14.176 It is proposed that a regulation will be made covering interests in a managed investment scheme and investment life insurance products that is modelled on section 64B of the Insurance Contracts Act:

•

if, on the day on which an investment-linked contract is cancelled or an interest in a managed investment scheme is returned, the amount that would have been the allocation price if the contract had been entered into on that day or the interest issued on that day is less than the allocation price on the day on which the contract was entered into or the interest is issued, the amount otherwise payable is reduced by that amount;

•

if, on the day on which an investment-linked contract is cancelled or interest in a managed investment scheme is returned, the amount that would have been the allocation price if the contract had been entered into on that day or the interest issued on that day is greater than the allocation price on the day on which the contract was entered into or interest issued, the amount otherwise payable is increased by the adjustment amount;

•

investment linked contract : means a contract, the principal object of which is the provision of benefits calculated by reference to units the value of which is related to the market value of a specified class or group of assets of the party by whom the benefits are to be provided;

•

allocation price : means the amount that represents the value of an investment unit for the purposes of the issue of the contract/interest;

•

investment unit : means a unit by reference to the value of which benefits are to be calculated.

Tax effected products:

14.177 It is proposed that a regulation will be made modelled on section 64(6) of the Insurance Contracts Act.

•

If:

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a tax of any kind has been paid, or is payable, by the issuer because of the cancellation of the financial product; and

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either:

~

in a case in which the tax has been paid - the issuer is unable to obtain a refund of the tax; or

~

in a case in which the tax has not been paid - the tax does not cease to be payable as a result of the cancellation of the financial product;

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the amount that would otherwise be payable is reduced by the amount of the tax.

Treatment of superannuation products and RSAs

14.178 It is proposed that the existing SIS Act cooling-off provisions in sections 170-172 will be carried across to the new regime. The provisions in the SIS Act will be repealed in later legislation.

14.179 It is proposed that the existing RSA Act cooling-off provisions in section 62 will be carried across to the new regime. The provisions in the RSA Act will be repealed in later legislation.

14.180 These provisions will be amended following the passage of the Superannuation Legislation Amendment (Choice of Superannuation Funds) Bill to give effect to changes to cooling-off resulting from choice of superannuation funds.

Stop Orders by ASIC

14.181 Proposed 1020E gives ASIC a power to issue stop orders where there is a misleading a deceptive statement in, or an omission from, a disclosure document, a supplement or other disclosure material required to be prepared or any advertising or promotional material. This provision is modelled on, with some modification, the stop order powers in the current fundraising provisions of the Corporations Law (section 739 of the Corporations Law).

14.182 Proposed section 1020E provides that ASIC may issue a stop order in the following circumstances:

•

a document or information required to be given under Part 7.9 or an advertisement or promotional material in relation to a product is defective. This would apply to the PDS, any additional information provided, ongoing disclosures and periodic statements and confirmations. It would not apply to disclosures made under the continuous disclosure provisions in Chapter 6CA of the proposed Corporations Act;

•

the product issuer does not have or has not maintained approved internal and external dispute resolution mechanisms.

14.183 An order must be in writing and served on the product issuer or, in situations where the seller is required to produce a PDS, the seller (proposed section 1020E(7)).

14.184 There is an obligation on the product issuer or seller to take reasonable steps to notify relevant financial service licensees of the stop order and to ensure the financial service licensees do not recommend or arrange for the issue products under a stop order. Financial service licensees will then be subject to the stop order and be obliged to comply with it unless they did not know of the order (see proposed subsections 1020E(8) and (9)).

Fleshing out the detail of the legislative requirements

14.185 As noted above, the product disclosure provisions are drafted at a level of general principle that is intended to be capable of flexible application across the full range of financial products that are subject to the provisions. It is recognised, however, that in some cases both industry and the regulator will be looking for further guidance on how particular provisions are to apply in relation to particular products and circumstances. It is also acknowledged that the provisions may not apply appropriately in particular circumstances and may require modification. The draft provisions provide a number of mechanisms for both fleshing out the detail and, where necessary, modifying the application of the provisions.

•

ASIC will have an exemption and modification power in relation to Part 7.9 (proposed section 1020F). That power will enable ASIC to exempt persons or products from all or specified provisions of the Part, either conditionally or unconditionally, and to modify the application of particular provisions in relation to persons or products. However, ASIC will not be able to extend the scope of the Part to products or persons it would not otherwise apply to through its exemption and modification power (proposed subsection 1020F(3)). ASIC will also be able to provide administrative guidance in the form of policy statements as to what it regards as compliance with the legislative provisions in all, or particular cases;

•

in addition to the various specific regulation making powers in provisions in Part 7.9 which enable the detail of the requirements to be fleshed out, there is also a more general regulation-making power which will enable exemptions and modifications from the Part. This power will enable the regulation to extend the scope of the Part by:

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modifying the provisions so that they apply in relation to persons, products or situations to which they would not otherwise apply;

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modifying the provisions so that they change the person to whom or by whom a document or information is required to be given (proposed section 1020G).

•

the detail of the legislative requirements may also be fleshed out in industry codes of conduct which may be approved by ASIC.

Criminal liability

14.186 Offences for contravening a number of provisions in Part 7.9 are created through the operation of subsection 1311(1). Those relating to PDSs and other statements required to be given under Part 7.9 are located in Subdivision A of Division 7 and are discussed below.

14.187 However, offences related to proposed sections 1015D, 1017A and subsection 1017E(2) are also located in Subdivision A of Division 7.

14.188 Proposed section 1021M makes contravening proposed section 1015D an offence. Strict liability as well an ordinary offence are provided due to the possibility that contraventions of 1015D may be minor or technical in nature (because of the possibility, for example, of contravening proposed subparagraph 1021M(1)(a)(i) by telling ASIC too late). A similar approach is taken in proposed section 1021O in relation to a contravention of proposed subsection 1017E(2) due to the technical nature of the requirements in that provision.

14.189 Proposed section 1021N makes it an offence not to take reasonable steps to comply with proposed section 1017A. This type of offence has been used as it would note be appropriate to make a contravention of proposed section 1017A an offence in all cases, only where reasonable steps have not been taken.

Liability for disclosure document and statements

14.190 The provisions in Subdivision A of Division 7 are somewhat similar to those dealing with disclosure documents or statements in Part 7.7. In particular the approach to liability for authorised representatives is similar.

14.191 Proposed section 1021C defines a disclosure document or statement to be a PDS, supplementary PDS or statement required by paragraph 1012G(3)(a) to be read to a person.

14.192 Proposed section 1021I makes it an offence for an unauthorised representative to give out a FSG or supplementary FSG where it has not been authorised by the person required. Proposed section 1021K makes it an offence for a person to give someone a PDS or supplementary PDS which has been altered otherwise than in accordance with the authority of the relevant responsible person where the alteration makes the document defective or more defective.

14.193 Proposed section 1021G provides a general obligation on licensees to take reasonable steps to ensure that authorised representatives comply with the requirements of Part 7.9 in relation to the provision of disclosure documents or statements. This is consistent with the approach discussed above in relation to liability of licensees for their authorised representatives.

Failure to provide a disclosure document or statement

14.194 Proposed section 1021C makes it an offence to fail to provide a disclosure document or statement where required by Part 7.7. Due to the technical nature of the requirements of giving a disclosure document or statement, a strict liability offence with a pecuniary penalty only is provided in addition to a fault element offence to provide flexibility in enforcement of this provision.

Providing defective disclosure document or statement

Providing a disclosure document or statement knowing that it is defective

14.195 Proposed section 1021D covers the situation where the person who prepared a disclosure document or statement and knows that it is defective gives it to another person:

•

in a situation where Part 7.9 requires it to be given;

•

in other situations where the other person may rely on it;

•

to a third party who may then provide it to someone else in either of the other two situations.

14.196 Proposed section 1021F makes it an offence for a regulated person (other than the preparer) to knowingly distribute a defective disclosure document or statement.

Providing a disclosure document or statement that is defective (whether known to be defective or not)

14.197 Proposed section 1021E is similar to 1021D but it also covers situations where the person preparing the disclosure document or statement may not know that it is defective. In these situations a defence of taking reasonable steps is provided. These provisions do not require defences for authorised representatives as only the person who actually prepared the disclosure document or statement can contravene them.

14.198 There is no equivalent of proposed section 1021D for a person other than a product issuer, this ensures that only the person who prepares a disclosure document or statement is responsible for its content (other than a person who actually knows that it is defective).

People who consent to the inclusion of a statement in a PDS

14.199 Proposed section 1021L relates to people who consent to the inclusion of a statement in PDS or supplementary PDS (see proposed paragraph 1013K(1)(a)). Proposed subsection 1021L(1) makes it an offence to consent to the inclusion of such a statement if it is defective. The default Criminal Code fault element of recklessness would apply to the circumstance that it is defective. Proposed subsection 1021L(2) makes it an offence where a person after consenting to the inclusion of the statement becomes aware that it is defective or that the inclusion of the statement in the PDS or supplementary PDS has made that document defective and the person fails to withdraw their consent. Such a withdrawal would give the responsible person actual knowledge of the defect and would trigger proposed section 1021J discussed above.

When a person finds out that a PDS is defective

14.200 Proposed section 1021J ensures that where a preparer of a disclosure document or statement becomes aware that it is defective, that steps are taken to either rectify the defect or stop giving the document out. It makes it an offence for such a person to fail to take reasonable steps to ensure that any regulated person to whom the document has been provided for further distribution a direction to rectify the defect or stop giving out the document. It is an offence for a regulated person to contravene such a direction. It is also an offence for a regulated person who becomes aware that a document is defective to fail to tell the responsible person.

Formal Requirements

14.201 Proposed section 1021H makes it an offence for a person who prepares a PDS or supplementary PDS to contravene formal requirements relating to them (such as ensuring that Product Disclosure Statement is on the cover of the document or that the document is dated). A person is liable where they actually give out a FSG or supplementary FSG themselves (whether in a situation where one is required or in any other situations where they are reckless as to whether someone may be relied on it) or give it to a third party who may provide it in one of these situations.

14.202 Strict liability applies to whether the document complies with the relevant formal requirements. This is necessary to ensure the effective enforcement of contraventions of these provisions which carry only a low pecuniary penalty and are offences of a technical nature. Otherwise, the fault element of recklessness would apply to this circumstance. Strict liability does not apply to the actual giving or authorising of the statement as the application of the fault element of intention to this conduct would not be particularly difficult to show.

Civil liability

14.203 Subdivision B of Division 7 of Part 7.9 provides people with a civil action for loss or damage. These provisions are similar to those for civil liability in proposed Part 7.7.

14.204 Proposed section 1022B lists the situations where such action can be taken. They are not providing a disclosure document or statement where required or providing a defective one or consenting to (or failing to withdrawal a consent to) a statement in a PDS or supplementary PDS.

14.205 For the purposes of civil liability defective as defined in proposed section 1021B is similar to the definition for criminal liability but does not require the statement of omission to be materially adverse. The materially adverse concept is not appropriate for civil liability as a person must demonstrate that they have suffered loss or damage as a result of the defect. This in itself establishes that the defect was significant without any need for a requirement of materially adverse.

14.206 Proposed subsection 1053B(8) provides that for an action for relating to a defective document or statement there is no liability where the person took reasonable steps to ensure that it would not be defective.

14.207 Proposed subsections 953B(3) and (4) set out who is liable.

14.208 Generally, the licensee is always liable regardless of whether the contravention resulted from conduct of the licensee or an authorised representative. This ensures that clients will always have a licensee to take action against for loss or damage. The only exception is where a person altered a FSG or supplementary FSG without authority from the relevant licensee, in that situation (beyond the control of the licensee) the person who made the alteration is liable. Where more than one licensee is potentially liable, proposed section 917C is used to determine which licensee or licensees jointly are liable.

14.209 Where the action relates to a defective document or statement, any person involved in its preparation who directly or indirectly caused it to be defective or contributed to it being defective is also liable, in addition to the licensee.

14.210 In addition to the power to being able to recover loss or damage under these provisions, proposed section 1022C also gives the court the power to make additional orders where it thinks these are necessary to do justice between the parties. These orders include declaring a contract void and any additional orders that are necessary or desirable because of that order. These additional orders can include but are not limited to an order for the return of money or payment of an amount of interest.