House of Representatives

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Josh Frydenberg MP)

Chapter 2 - Disclosure of lack of independence (recommendation 2.2)

2.1 Schedule 2 to the Bill amends the Corporations Act to require a providing entity (a financial services licensee or authorised representative) to give a written disclosure of lack of independence where they are authorised to provide personal advice to a retail client. ASIC may by, legislative instrument, determine requirements for the purposes of the disclosure.

Context of amendments

Existing law

2.2 Entities providing financial services are subject to a range of regulatory requirements to protect clients. These obligations include restrictions on the use of terms that imply that the entity is independent (if this is not the case) and to provide disclosure documents.

Lack of independence

2.3 Under section 923A(1) of the Corporations Act, the assumption and use of certain words or expressions (including 'independent', 'impartial' and 'unbiased') by or on behalf of entities providing financial services or carrying on a financial services business is restricted.

2.4 Under section 923A(2) of the Corporations Act, a person may only use a restricted word or expression in relation to a financial services business or financial service if, broadly:

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the person (or anyone providing a financial service on their behalf or anyone on whose behalf they are providing a financial service) does not receive:

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a commission (other than a commission that is rebated in full);

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remuneration calculated based on the volume of business placed by the person with the issuer of the product; or

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other gifts or benefits from the product issuers that may reasonably be expected to influence the person; and

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the person is not directly or indirectly restricted in relation to the financial products in respect of which they provide financial services (disregarding certain regulatory restrictions under section 923A(3) of the Corporations Act); and

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the person does not have a conflict of interest arising from a connection with an issuer of financial products that could reasonably be expected to influence the person in carrying on the business or providing the service.

2.5 Otherwise, if a person uses a restricted term in relation to a financial services business or financial services under section 923A(1) of the Corporations Act, the person is guilty of an offence. The offence is subject to a fine of up to 10 penalty units for an individual or 100 penalty units for a corporation for each day or part of a day in which the offence was committed (see Schedule 3 of the Corporations Act).

Disclosure

2.6 Part 7.7 of the Corporations Act, together with the related regulations, imposes a range of disclosure obligations on entities that provide financial services. These obligations include the requirement to provide a Financial Services Guide.

2.7 A financial services licensee or authorised representative (a providing entity) is generally required to provide a Financial Services Guide to a retail client before providing financial services to that client (see sections 941A, 941B and 941D of the Corporations Act).

2.8 The main requirements for what a Financial Services Guide must contain are set out in sections 942B and 942C of the Corporations Act. Among other things, a Financial Services Guide must:

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identify who the entity acts for in providing the relevant financial services;

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provide information about the remuneration received by the entity and certain related entities as a result of the provision of the services;

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provide the level of information on the specified matters necessary for a reasonable person to make an informed decision about acquiring the financial services; and

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be presented clearly and concisely.

2.9 There are a range of other requirements for Financial Services Guides and other disclosure documents set out in Part 7.7 of the Corporations Act and the related regulations.

2.10 A providing entity that fails to provide a satisfactory Financial Services Guide is subject to a civil penalty (see section 1317E of the Corporations Act). Under section 1317G of the Corporations Act, the maximum amount of the penalty for an individual is the greater of 5,000 penalty units and three times the benefit derived and detriment avoided from the failure to disclose. The maximum amount of penalty for a body corporate is the greater of:

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50,000 penalty units;

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three times the benefit derived and detriment avoided; and

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10 per cent of the annual turnover of the body corporate for the 12-month period ending at the end of the month in which the body corporate contravened, or began to contravene, the civil penalty provision (up to an amount of no more than 2.5 million penalty units).

Financial Services Royal Commission

2.11 Commissioner Hayne considered whether there were additional means by which conflicts of interest could be better managed.

2.12 One such means was to improve the disclosure of conflicts of interest. Commissioner Hayne noted that currently there is no requirement for financial advisers who are not independent to explain to a client that they are not independent.

2.13 Commissioner Hayne noted that a client may be able to infer from some of the matters disclosed in a Financial Services Guide that a financial adviser was not independent, and why. However, he considered that this is not sufficient, and that the adviser's lack of independence should be brought to the client's attention in a prominent, clear and concise manner.

2.14 Commissioner Hayne recommended that the law be amended to require that a financial adviser who would contravene section 923A of the Corporations Act must, before providing personal advice to a retail client, give the client a written statement (in or to the effect of a form to be prescribed) explaining simply and concisely why the adviser is not independent, impartial and unbiased.

Summary of new law

2.15 Schedule 2 amends the Corporations Act to require a providing entity (a financial services licensee or authorised representative) to give a written disclosure of lack of independence where they are authorised to provide personal advice to a retail client. ASIC may, by legislative instrument, determine requirements for the purposes of the disclosure.

Comparison of key features of new law and current law

Detailed explanation of new law

Disclosure of lack of independence by providing entities

2.16 Schedule 2 amends the Corporations Act to require a providing entity to give a written disclosure of lack of independence where they are authorised to provide personal advice to a retail client.

2.17 Schedule 2 also amends the Corporations Act to allow ASIC to prescribe, by legislative instrument, requirements for the disclosure statement. [Schedule 2, items 6 and 8, sections 942B(7A), 942B(7B), 942C(7A) and 942C(7B) of the Corporations Act]

2.18 This new obligation is added to the existing Financial Services Guide disclosure obligations under Division 2 of Part 7.7 of the Corporations Act. The lack of independence disclosure statement is included in the list of statements and information to be included in a Financial Services Guide.

2.19 Specifically, Schedule 2 amends the main requirements for a Financial Services Guide in sections 942B and 942C of the Corporations Act. As a result of these amendments, a providing entity that is not independent (that is, an entity that would contravene section 923(1) if they used the word 'independent' or a similar term) must include a statement in the Financial Services Guide that:

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sets out that the providing entity is not independent, impartial or unbiased (which are restricted words or expressions within the meaning of section 923A(5)) in relation to the provision of personal advice, and explains the reasons why; and

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if any other word or expression has been specified as a restricted word or expression for the purposes of section 923A(5)(a)(ii)-sets out that the providing entity is not able to assume or use the restricted word or expression in relation to the provision of personal advice, and explains the reasons why, and

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meets the requirements (if any) determined in an ASIC legislative instrument under section 942B(7A).

[Schedule 2, items 5 and 7, sections 942B(2)(fa) and 942C(2)(ga) of the Corporations Act]

2.20 This ensures that retail clients receive a disclosure statement about independence that explains clearly and concisely why the providing entity is not independent.

2.21 The penalty for failing to provide the disclosure statement is a civil penalty. As the disclosure statement is part of the statements and information to be provided in a Financial Services Guide, the penalty for failing to provide a lack of independence disclosure statement is the same penalty that applies if a providing entity fails comply with the requirement to provide a satisfactory Financial Services Guide (see paragraph 2.10 and section 1317E of the Corporations Act).

2.22 The disclosure statement must be consistent with any requirements about the disclosure prescribed by ASIC by legislative instrument (if such a legislative instrument has been made). This enables ASIC to ensure that a providing entity's lack of independence is explained prominently, clearly and concisely to clients. The requirement to be consistent with requirements prescribed by ASIC also ensures that there will be a consistent approach taken to how information about a lack of independence is presented in disclosure statements from all providing entities in Australia who must comply with the new obligation. [Schedule 2, items 5 and 7, sections 942B(2)(fa)(iii) and 942C(2)(ga)(iii) of the Corporations Act]

2.23 Where ASIC has not made a legislative instrument prescribing requirements for the disclosure statement, a providing entity must still provide the disclosure statement. In such circumstances, providing entities have discretion on the form of the statement but the statement must still satisfy the other two requirements set out in paragraph 2.19.

2.24 Under the current law, a providing entity is generally required to provide a Financial Services Guide to a retail client before providing a financial service to that client. Where a financial adviser is giving advice as an employee of a providing entity, the lack of independence disclosure must still relate to the providing entity, not the employee.

Disclosure where a providing entity is not required to provide a Financial Services Guide

2.25 Schedule 2 also changes the information that must be provided in circumstances where a providing entity does not provide a Financial Services Guide. The specific amendments are:

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an amendment to include the disclosure of lack of independence in the list of required information that must be provided where financial product advice is given about certain basic deposits and other products [Schedule 2, item 3, section 941C(7) of the Corporations Act]; and

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an amendment to include the disclosure of lack of independence in the list of required information that must be provided in time critical cases where the client expressly instructs that they require financial services to be provided immediately or by a specified time and, it is it not reasonably practicable to give the Financial Services Guide before the service is provided. [Schedule 2, item 4, section 941D(3)(a) of the Corporations Act]

Consequential amendments

2.26 Schedule 2 makes amendments as a consequence of amending the obligations to provide Financial Services Guides by linking the obligation to the restriction in section 923A(1) of the Corporations Act. This includes inserting a note outlining that a Financial Services Guide may need to include a statement relating to the restriction in this section, and a provision for avoidance of doubt in section 923A of the Corporations Act. [Schedule 2, items 1 and 2, section 923A of the Corporations Act]

2.27 The avoidance of doubt provision clarifies that the use of a restricted word or expression in the lack of independence disclosure statement does not contravene section 923A of the Corporations Act. This makes clear that a providing entity will not be penalised for complying with the disclosure requirements and stating that they are not independent, unbiased or impartial. [Schedule 2, item 2, section 923A(6) of the Corporations Act]

Application and transitional provisions

2.28 Financial Services Guides provided to new clients on or after 1 July 2021 must include the lack of independence disclosure statement. [Schedule 2, item 9, section 1674 of the Corporations Act]

2.29 A transitional rule applies providing that the disclosure of lack of independence must be provided if the providing entity has given a Financial Services Guide to the client before 1 July 2021 and the financial services are provided to the client on or after 1 July 2021. The statement must be provided whether or not the failure to disclose would be materially adverse from the point of view of a reasonable person. This avoids any ambiguity about whether the statement must be provided for services that have been provided with an existing Financial Services Guide. [Schedule 2, item 9, sections 1674 and 1674A of the Corporations Act]

2.30 Where the providing entity has already given a Financial Services Guide before 1 July 2021, the providing entity does not need to release a new Financial Services Guide that contains the disclosure of lack of independence from 1 July 2021. In line with existing obligations about updating Financial Services Guides (see section 941F of the Corporations Act) the providing entity may choose to provide it in a Supplementary Financial Services Guide. [Schedule 2, item 9, sections 1674A(1)(d) and 1674A(1)(e) of the Corporations Act]