1 March 2007

Corporate and Financial Services Reform Update March 2007

The first tranche of draft regulations was released for public consultation on 26 March 2007 as part of the Corporations and Financial Services Regulation Review process.

Some key issues dealt with in the first round of draft regulations are set out below:

Keeping Financial Services Guides and Product Disclosure Statements up to date

Where there is a change of circumstances or new information becomes available that would mean that an FSG or PDS is out of date, the issuer of the FSG or PDS will not be deemed to breach the requirement under Chapter 7 of the Corporations Act to keep the document up to date where the change in circumstances or new information is not “materially adverse” to investors. To rely on the exemption, the FSG or PDS must have been up to date at the time it was prepared, and must contain a statement to the effect that:

  • the PDS or FSG may be updated from time to time without the need to notify investors where the changes are not materially adverse and
  • the disclosure document, if updated, will be available on request at no charge.

    This proposed regulation largely mirrors relief already provided under ASIC Class Order 03/237 for PDSs (although note the requirement under the draft regulation is to provide an updated PDS – if available – rather than just make available the new information as required under Class Order 03/237) and extends it to FSGs.

Incorporation by reference in Product Disclosure Statements and Statements of Advice

Where information required to be included in a PDS or SOA under Chapter 7 of the Corporations Act is publicly available in another document or on a website, the issuer will not have to include such information in the PDS or SOA.

The exemption in respect of SOAs is limited to allow reference to documents previously provided to the client where the SOA includes a statement that the information referred to and previously provided may be obtained upon request at no charge.

The exemption as it relates to PDSs is currently limited to information required to be included in the PDS that might influence an investor’s decision to acquire the product, or information which relates to any other significant features or characteristics of the product or of the rights, terms, conditions and obligations attaching to the financial product. The exemption will apply to a PDS provided the reference in the PDS to the source document or webpage is sufficiently detailed to allow a potential investor to decide whether to obtain a copy of the document. Treasury has called for submissions as whether the exemption should be widened to allow incorporation by reference for other PDS content requirements in Chapter 7.

Issuers of PDSs should note that they will be responsible for any information incorporated by reference into a PDS in this manner, so they must ensure that the information meets the “clear, concise and effective” test.

Relief from responsibility for secondary service providers

Where a financial services licensee provides a service to a retail client through an intermediary, the financial services licensee will not be taken to have provided a financial service to the client if:

  • the intermediary holds a financial service license or is an authorised representative of  a financial services licensee and duly authorised to provide the service and
  • the intermediary accepts responsibility for meeting all obligations to the client under the Corporations Act in respect of the financial service provided.

The responsibility can be accepted by the intermediary either in writing or can be enforced by the financial services licensee when the provision of the service by the intermediary is made against the explicit directive of the financial services licensee. In either case, the intermediary must then inform the client in writing that it has taken responsibility for meeting the obligations owed to the client under Chapter 7 of the Corporations Act.

The proposed amendment is sensible as it makes the licensed or authorised intermediary responsible for ensuring the financial services provided to the client comply with the law rather than making the financial services licensee responsible for such compliance in circumstances where it has no direct contact with the client. The legislation will effectively treat the intermediary as the wholesale client of the financial services licensee, and the client as the retail client of the intermediary.

Trustees/businesses as wholesale investors

Under the proposed regulations, a trustee of multiple superannuation funds will be treated as a wholesale investor provided at least one of the funds for which it acts as trustee holds net assets in excess of $10M. On a technical reading of the law as it stands, the determination of whether a trustee is to be treated as a retail or wholesale investor depends on which fund it is acting as trustee for at the time it receives the relevant financial services, even if it is trustee for numerous other funds that hold assets in excess of $10million.

In addition, a business will be treated as a wholesale client in respect of the provision of financial services relating to superannuation or RSA products provided the business is not a small business (as defined in section 761G). This removes the anomaly in section 761G(6) where even large businesses are treated as retail clients where the service provided relates to superannuation products.

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