Explanatory Memorandum
Circulated by the authority of the Treasurer, the Hon Wayne Swan MPChapter 7 - Financial services licensing, conduct, advice and disclosure
Outline of chapter
7.1 Schedule 2 to the First Home Saver Accounts (Consequential Amendments) Bill 2008 (FHSA (Consequential Amendments) Bill 2008) amends the Corporations Act 2001 (Corporations Act) and the Australian Securities and Investments Commission Act 2001 (ASIC Act) to ensure that the financial services licensing, conduct, advice and disclosure rules apply appropriately to First Home Saver Accounts (FHSAs).
Context
7.2 The Corporations Act and the ASIC Act provide for the regulation of financial products and services. The First Home Saver Accounts Bill 2008 (FHSA Bill 2008) introduces a new kind of financial product - FHSAs. FHSAs come within the existing general definition of 'financial product' in section 763A of the Corporations Act. Consequently, the licensing, conduct, advice and disclosure provisions of the Corporations Act and the Corporations Regulations 2001 will apply to FHSAs unless expressly modified by legislation or regulations. In some cases the Corporations Act applies differently to different kinds of financial products.
7.3 As noted in Chapter 1, FHSAs can have different legal forms depending on the account provider offering them. They may be a deposit account, a life policy or an interest in a trust. This can have implications for the way the Corporations Act and the ASIC Act apply to them. The amendments in Schedule 2 ensure that the Corporations Act and the ASIC Act apply appropriately to FHSAs.
7.4 In addition to the amendments made to the Corporations Act and the ASIC Act in the FHSA (Consequential Amendments) Bill 2008, a number of other changes will be made to the Corporations Regulations 2001 to accommodate FHSAs. In particular, the Corporations Regulations 2001 are to be amended to introduce shorter and simpler product disclosure statements for FHSAs and to deal with the financial services licensing requirements for trustees of public offer superannuation funds. These amendments to the Corporations Regulations 2001 will also ensure that existing trustees of public offer superannuation funds will not need to seek a licence variation to offer FHSAs.
Summary of new law
7.5 These amendments to the Corporations Act and the ASIC Act ensure that FHSAs:
- •
- are accompanied by appropriate disclosure documents (including a product disclosure statement and periodic statements);
- •
- are not subject to unnecessary regulation;
- •
- are subject to a mandatory cooling-off period; and
- •
- are treated the same under the Corporations Act, regardless of the issuing entity and the legal nature of the accounts.
Detailed explanation of new law
7.6 While an FHSA is a 'financial product' under the general definition in section 763A of the Corporations Act, in some cases the provisions apply differently depending on the type of financial product and there are also some provisions that apply only to certain specified financial products. The amendments to the Corporations Act and the ASIC Act clarify the way in which those Acts apply to FHSAs.
Coverage of First Home Saver Accounts under the ASIC Act and the Corporations Act 2001
7.7 As the financial services regulator, the Australian Securities and Investments Commission (ASIC) is responsible for licensing and monitoring financial services markets and businesses in Australia. To enable ASIC to perform this role, under the ASIC Act, it is given functions and powers under the corporations legislation (section 11) and various other Acts related to financial products and services (section 12A). This list has been amended to provide that ASIC has functions and powers under the 'First Home Saver Accounts Act 2008'. [ Schedule 2 to the FHSA (Consequential Amendments) Bill 2008, item 1; paragraph 12A(1)(h) ]
7.8 ASIC will also be provided with the functions and powers conferred on it by section 3 of the FHSA Bill 2008. Those functions and powers include regulating when trustees can offer an interest in the FHSA trust (ie, offer a FHSA), and requiring trustees to comply with the prescribed rules in relation to commission and brokerage payments, and rules on fair dealing when issuing or redeeming an interest in an FHSA trust. [ Part 1, Division 1, section 3 of the FHSA Bill 2008 ]
First Home Saver Accounts are a financial product
7.9 The regulatory arrangements for financial services under the Corporations Act and the ASIC Act rely on the definition of 'financial product' in those Acts. Although FHSAs come within the general definitions of financial product in section 763A of the Corporations Act and subsection 12BAA(1) of the ASIC Act, to avoid any doubt, and to enable FHSAs to be regulated consistently under the Acts, a definition of 'FHSA product' is inserted into sections 9 and 761A of the Corporations Act [ Schedule 2 to the FHSA (Consequential Amendments) Bill 2008, items 3 and 6; sections 9 and 761A ], and FHSA products are included in the specific things that are financial products in subsection 12BAA(7) of the ASIC Act [ Schedule 2 to the FHSA (Consequential Amendments) Bill 2008, item 2; paragraph 12BAA(7)(ga) ] and section 764A of the Corporations Act [ Schedule 2 to the FHSA (Consequential Amendments) Bill 2008, item 9; paragraph 764A(1)(ha) ].
First Home Saver Accounts are not managed investment schemes
7.10 As FHSAs will have a different legal nature depending on the type of product provider, there is also the potential for FHSAs to fall within other definitions in the Corporations Act that apply to those different types of products.
7.11 In particular, FHSAs offered by public offer licensees could come within the definition of 'managed investment scheme' in section 9 of the Corporations Act. The regulatory regime for managed investment schemes as set out in Chapter 5C of the Corporations Act is not intended to cover institutions which are regulated by the Australian Prudential Regulation Authority (APRA). As all FHSA providers will be regulated by APRA, all FHSAs are excluded from the definition of 'managed investment scheme' in section 9 of the Corporations Act. [ Schedule 2 to the FHSA (Consequential Amendments) Bill 2008, item 4; section 9, paragraph (ha) of the definition of 'managed investment scheme' ]
First Home Saver Accounts are not a basic deposit product
7.12 It is arguable that FHSA provided by authorised deposit-taking institutions (ADIs) could be regarded as coming within the definition of 'basic deposit product' in section 761A of the Corporations Act.
7.13 Issuers of basic deposit products are exempt from many of the advice and disclosure obligations of the Corporations Act. As regards disclosure, the issuer is not obliged to give the client a financial services guide, a statement of advice or a product disclosure statement (provided certain other information is given to the client). Also, ASIC regards basic deposit products as 'Tier 2' (lower level) products for the purposes of its financial advice training standards.
7.14 FHSAs have a number of features that are not normally associated with basic deposit products such as eligibility and withdrawal requirements, Government contributions and concessional taxation treatment that make it inappropriate for them to be treated as basic deposit products. There are also considerations of competitive neutrality, as issuers of FHSAs which are not banks, building societies or credit unions will not be subject to the same exemptions.
7.15 To resolve any doubt, all FHSAs are expressly excluded from the definition of 'basic deposit product'. [ Schedule 2 to the FHSA (Consequential Amendments) Bill 2008, item 5; section 761A, paragraph (da) of the definition of 'basic deposit product' ]
Providing First Home Saver Accounts is not a custodial or depository service
7.16 Sections 766A and 766E of the Corporations Act bring within the definition of 'financial service' a custodial or depository service. This category was included in the Act to capture certain financial activities which would not otherwise come within the definition of 'financial service'. Providing a custodial or depository service occurs where, under an arrangement between the provider and the client, a financial product, or a beneficial interest in a financial product, is held by the provider in trust for, and on behalf of, the client or another person nominated by the client.
7.17 FHSAs provided by public offer licensees, as interests in a trust, could potentially come within the definition of 'custodial or depository service'. Given that FHSAs will be regulated under the First Home Saver Accounts Bill 2008, and to avoid unnecessary cost and compliance burdens, the provision of FHSAs (offered by public offer licensees) is excluded from the meaning of 'providing a custodial or depository service' (section 766E). [ Schedule 2 to the FHSA (Consequential Amendments) Bill 2008, item 10; paragraph 766E(3)(cb) ]
Statement of advice requirements
7.18 Normally, when personal advice is given about a financial product to a retail client, the person providing the advice must give the client a statement of advice. (In the vast majority of cases, a person will acquire an FHSA as a retail client.) However, there is an exception, under section 946AA of the Corporations Act, for advice about 'small investments'. The relevant conditions are:
- •
- the total value of all investments in relation to which the advice is provided does not exceed the 'threshold amount' (currently $15,000); and
- •
- the advice does not relate to a derivative, a general insurance product or a life risk product, or to a superannuation product or a retirement savings account product unless the client already has an interest in the product.
However, the providing entity must keep, and provide to the client, a record of advice.
7.19 To avoid doubt, the section is amended to specify that the providing entity does not have to give the client a statement of advice where the advice relates to an FHSA product and the total value of all investments in relation to which the advice is provided does not exceed the 'threshold amount'. [ Schedule 2 to the FHSA (Consequential Amendments) Bill 2008, item 11; subsection 946AA(1A) ]
Financial product disclosure
7.20 Generally a product disclosure statement is required to be given to a person when a financial product is issued or sold and when personal advice is given recommending a particular financial product. The product disclosure statement content requirements for FHSAs will be outlined in regulations made under the Corporations Act. The circumstances in which a product disclosure statement must be given in the Corporations Act will apply to FHSAs.
Meaning of ' issue of a financial product'
7.21 Section 761E of the Corporations Act defines when a financial product is 'issued' to a person. Subsection 761E(3A) broadly provides that further contributions to financial products that are already held by the client are not an 'issue of a financial product'.
7.22 There is some doubt that all FHSAs (especially those issued by public offer licensees) are covered by the existing exclusions in subsection 761E(3A). The provision is amended to ensure that all FHSAs are treated the same, by:
- •
- inserting a new item 2A into the table in subsection 761E(3) to specify when an FHSA product is issued [ Schedule 2 to the FHSA (Consequential Amendments) Bill 2008, item 7; subsection 761E(3), item 2A in the table ]; and
- •
- providing that a further contribution into an FHSA product is not considered an issue of a financial product [ Schedule 2 to the FHSA (Consequential Amendments) Bill 2008, item 8; paragraph 761E(3A)(ba) ].
Application forms to be included in or accompany product disclosure statements
7.23 In general, an FHSA product only can be issued or sold in response to an application form that is attached to or accompanies the product disclosure statement. The Corporations Act does not specify the requirements for an application form. For FHSAs, an application to open an account will need to be made in a form approved by the Commissioner of Taxation. [ Part 3, Division 1, section 5 of the FHSA Bill 2008 ]
7.24 Under section 1016A of the Corporations Act, a 'restricted issue' or 'restricted sale' of an FHSA to a retail client may only be made using an application form. (In practice, a 'restricted issue' or 'restricted sale' will cover most situations where a product is sold or offered to a retail client.)
7.25 A 'relevant financial product' may only be issued or sold if the client fills out an application form that is included with, or accompanies, a product disclosure statement. Those products are managed investments, superannuation, retirement savings accounts or any other product specified in regulations which are made for the purposes of the definition.
7.26 The definition of 'relevant financial product' is amended to include an FHSA product. [ Schedule 2 to the FHSA (Consequential Amendments) Bill 2008, item 12; paragraph 1016A(1)(da) ]
Periodic statements for retail clients
7.27 Account providers will be required to provide a periodic statement to an FHSA holder who is a retail client.
7.28 Under section 1017D of the Corporations Act, issuers of financial products that have an investment component are required to provide periodic statements to each holder of such a product for each reporting period during which the holder holds the product. The list of products currently includes managed investments, superannuation, retirement savings accounts, investment life insurance products and deposit products.
7.29 The list of products in paragraph 1017D(1)(b) is amended to include an FHSA product. [ Schedule 2 to the FHSA (Consequential Amendments) Bill 2008, item 13; subparagraph 1017D(1)(b)(iiia) ]
Cooling - off periods
7.30 A 14 day cooling-off period will apply when an individual who is a retail client opens an FHSA. The individual will be able to withdraw the funds deposited and close the account within the earlier of 14 days of receiving confirmation that the account has been opened or five days after the account was opened. (See also paragraph 5(3)(eb) of the FHSA Bill 2008.) They will not be required to transfer the funds to another FHSA.
7.31 Sections 1019A and 1019B of the Corporations Act provide that certain financial products are subject to a 14 day cooling-off period. Those products are risk insurance products, investment life insurance products, managed investment products, superannuation products and retirement savings account products.
7.32 The list in paragraph 1019A(1)(a) is amended to include FHSA products. [ Schedule 2 to the FHSA (Consequential Amendments) Bill 2008, item 14; subparagraph 1019A(1)(a)(iiia) ]