Financial Services AUS

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APEC FINANCIAL REGULATORS TRAINING INITIATIVE

REGIONAL TRAINING PROGRAM

8 NOVEMBER 2001

BEIJING

Financial Services Reform in Australia1

Good afternoon and thank you for giving me the opportunity to speak with you this

afternoon on Australias Financial Services Reform Legislation. We have a fairly intense

agenda to get through and whilst the focus is on the reforms proposed by the FSRA, I

thought it may be of benefit, and hopefully interest, to you to discuss firstly the

background to these reforms.

WALLIS

In 1996 the Australian Government established an Inquiry into the Australian Financial

System to review the significant changes to the regulatory framework since the Campbell

Committee Inquiry in 1981. The new Inquiry, known as the Wallis Inquiry after its

chairman, Stan Wallis, was to review these developments, consider the factors likely to

drive further change, and to make recommendations for possible further improvements to

the regulatory arrangements2.

The Treasurer provided the following mission statement:

The Inquiry is charged with providing a stocktake of the results arising from the financial

deregulation of the Australian financial system since the early 1980s. The forces driving

further change will be analysed, in particular, technological development.

Recommendations will be made on the nature of the regulatory arrangements that will bestensure an efficient, responsive, competitive and flexible financial system to underpin

stronger economic performance, consistent with financial stability, prudence, integrity and

fairness.3

1 The views expressed in this paper are the views of the authors and do not necessarily reflect the views orpolicies of the Asian Development Bank (ADB), or its Board of Directors or the governments theyrepresent. ADB makes no representation concerning and does not guarantee the source, originality,accuracy, completeness or reliability of any statement, information, data, finding, interpretation, advice,

opinion, or view presented.2 FSI Report Overview, page vii3 FSI Report Overview, page vii


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This era of accelerated change experienced since the early 80s stemmed from rapid

technological innovation and an evolving business environment together with longer-term

changes in customer needs and profiles, which are gradual, but powerful influences on

financial sector developments. There are a progressively greater array of industry

participants, products and distribution channels and competition is emerging from new

providers of financial services and the increasing globalisation of financial markets.4

The Wallis Committee reported in March 1997 and made 115 recommendations, of which

114 were accepted. (The only recommendation not accepted was that recommending the

six pillars policy should be removed. The six pillars policy separately imposes a

government prohibition on mergers among the largest four banks and the largest life

companies.5)

Some of the key recommendations, for our purposes today, included:

1. Corporations Law, market integrity and consumer protection should be combined

in a single agency. This resulted in the establishment of the Australian Securities

and Investments Commission (ASIC) in 1998, which combined the roles of the old

ASC, Insurance and Superannuation Commission and Australian payments system

council. Amongst other responsibilities the new ASIC was to be responsible for theadministration of all consumer protection laws for financial services.

2. Disclosure requirements should be consistent and comparables

3. Profile statements should be introduced for more effective disclosure, including

about offers of retail financial products.

4. A single licensing regime should be introduced for financial sales advice and

dealing

5. A single set of requirements should be introduced for financial sales and advicewhich include:

a. Minimum standards of competency and ethical behaviour

b. Requirements for the disclosure of fees and advisers capacity

c. Rules on handling client property and money

d. Financial resources or insurance available in cases of fraud or

incompetence; and

e. Responsibilities for agents and employees.

4 FSI Report Overview, page 35 FSI Report Overview, page 60 (Recommendation 83)

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6. Regulation of collective investments and public offer superannuation should be

harmonised

7. (ASIC) should authorise financial exchanges under a single regime

8. Exchange clearing houses should be appropriately authorised;

9. (ASIC) should have broad enforcement powers and

10. Regulatory agencies should have operational autonomy.

Naturally, there were a number of other recommendations regarding the role and

responsibilities of the Australian Prudential Regulation Authority, about financial safety

and prudential regulation generally and systems and stability. These are not directly

relevant to my presentation today so I will not go into them any further. I will however

make mention of the changed regulatory framework resulting from the Wallis Inquiry

recommendations.

In short, the Inquiry recommended that the framework based on four institutional

regulators be replaced by three agencies established on functional lines.6

The Reserve Bank of Australia (our central bank) holds the key responsibilities of

monetary policy and systems stability, and regulation of the payments system by its

Payments Systems Board.

The Australian Prudential Regulation Authority (APRA) is the prudential regulator

of deposit taking institutions, life and general insurance and superannuation.

ASIC (Australian Securities and Investments Commission) is responsible for

market integrity, consumer protection and corporations.

HIH INSURANCE

The effectiveness of the Wallis regulatory structure was challenged by some commentators

earlier this year with the collapse of HIH Insurance. As you may be aware, the collapse of

HIH Insurance Limited has been identified as one of the largest and most significant

corporate failures in Australias history. On 27 February this year, ASIC commenced a

formal investigation into HIH Insurance Limited and sought the suspension of trading in its

shares because we believed that the market was inadequately informed about the

company's financial position. We made it clear to HIH that we would not allow them to

recommence trading until their financial position was made known to the market. HIH

6 FSI Report Overview, page 25

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and have proper complaints-handling procedures. Since 1 July 1998, the consumer

protection role in the finance sector has been assumed by ASIC.

In addition to the corporate regulation, including conduct of directors and other office

bearers, reviewing disclosure to the market through annual reports and regulating other

company activities such as insolvent trading, ASIC also regulates conduct, disclosure,

complaints handling and other consumer protection issues for advice provided on the

following products:

Securities

Managed Investments

Life Insurance

General Insurance

Deposits

This covers a wide range of distribution outlets, including:

Licensed Securities Dealers

Licensed Investment Advisers

Fund Managers

Life and general insurance agents

Life and general insurance brokers

Life and general insurance companies

Banks

Friendly societies

Credit Unions and

Building Societies.

We do not ordinarily cover the activities of:

Real Estate agents

Funeral directors

Lawyers and accountants providing incidental advice

Business advisers

Financial consultants

Banks/credit unions/building societies in relation to credit products such as home

or personal loans,

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unless their activities relate to managed investments or other securities, if licensed by

ASIC.

APRA, on the other hand, focuses on the overall viability of those financial institutions.

APRA looks after the health of the institution as a whole so that the community can be

confident in its ability to meet its obligations to its customers collectively. It specifically

regulates the prudential requirements of:

Life insurance companies

General insurance companies

Superannuation trustees and their funds

Deposit taking institutions such as banks, building societies and credit unions

There are obviously overlaps between those issues relevant to examining the financial

safety of an institution and those involved in promoting consumer protection and market

integrity. The dividing lines are not always absolutely clear cut: APRA and ASIC, must

work together to ensure there are no regulatory gaps, whilst fulfilling individual regulatory

responsibilities as anticipated by the Wallis recommendations.

You may be aware that implementation of the Wallis recommendations were staged over a

number of years. Whilst APRA and ASIC were set up to commence 1 July 1998 and

regulation of superannuation, life and general insurance and banks transferred to the new

regulatory regime on this date, the non-bank deposit taking institutions transferred on the

1st July 1999 and other recommendations have been implemented throughout the period to

date. The final stage of Wallis reform implementation is the Financial Services Reform

Act, which passed through the Senate in August this year and will commence on 11 March

2002.

FSRA (IN GENERAL)

FSR is the sixth stage of the Corporate Law Economic Reform Program. The exposure

draft of the legislation was released in February 2000 and public submissions were invited.

In February 2001 the initial draft of the legislation was released, after consideration of

submissions received from industry, specialists and regulators, principally the ASIC. The

original commencement date was October 1, 2001 but commencement has been deferred

until March 11, 2002, followed by a two-year transitional period.

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Reference to the Financial Services Reform legislation includes the Financial Services

Reform Act, the Financial Services Reform (Consequential Provisions) Act, and the

regulations. The legislation is supplemented by ASIC Policy and Guidance as to how it

proposes to administer the law. The provisions of the FSRA are drafted to be flexible,

bearing in mind its key objectives, and much of the detail is covered in the regulations.

The Act affects the general insurance, life insurance, superannuation, and deposit taking

industries as well as investment advisors dealers, responsible entities and market makers.

The financial products it captures are diverse they need to meet clients needs for

investment and risk products, can be compulsory (superannuation) or voluntary and

distribution can be direct or through intermediaries at arms length.

The FSRA essentially provides a single regulatory regime for financial products and

services, financial markets and clearing and settlement facilities.

The main objectives of the FSRA are to promote:

Confident and informed decision making by consumers of financial products

and services while facilitating efficiency, flexibility and innovation in the

provision of those products and services

Fairness, honesty and professionalism by those who provide financial services

Fair, orderly and transparent markets for financial products, and

The reduction of systemic risk and the provision of fair and effective services

by clearing and settlement facilities.

And these objectives drive the following outcomes:

Harmonisation of the regulation of all financial products including managed

investments, superannuation, general and life insurance, securities, futures and

derivatives, foreign exchange and deposit accounts;

Provision of a single licensing framework for financial sales, advice and dealings

for financial services and uniform licenses for the authorisation of market operators

and clearing and settlement facilities. This means three new types of licence will

be created by the FSRA:

o Australian financial services licence (AFSL)

o Australian clearing and settlement facility licence

o

Australian financial markets licence, and

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Provision of a consistent and comparable disclosure regime across all financial

products.

A number of products have specifically been excluded from the legislation; such as

interests in unregistered managed investment schemes, reinsurance, health insurance, state

or northern territory insurance, funeral benefits and excluded securities; whilst others have

been specifically included into the triggering definitions of financial product or

financial service, regardless of whether they would ordinarily fall within these

definitional provisions. Certain products can also be included or excluded from the

definition of financial service by regulation, which highlights the significance of the

regulations in arriving at the final regime.

The commencement of FSRA will effect a number of existing laws and codes: it will

replace Chapters 7 and 8 of the Corporations Law and changes will be made to the ASIC

Act and current legislation governing the superannuation industry, retirement savings

accounts, insurance contracts and general insurance. Legislation governing insurance

agents and brokers will be repealed.

As you can appreciate the legislatives provisions are numerous and I therefore propose to

discuss the legislation in two stages firstly the uniform licensing and disclosure regimefor financial providers and in the second session this afternoon, financial markets and

clearing and settlement facilities.

FSRA WHAT IT MEANS

Now that you have some understanding as to what, it is hoped, the legislation will achieve,

let's delve a little further into what the FSRA provisions governing financial services

providers actually mean for industry. I propose to do this by looking broadly at thefollowing areas:

licensing

disclosure

ASIC powers

Remember that I am only talking about the Australian Financial Services Licence at this

point.

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Licensing

When is a license needed?

If a person provides a financial service they will need an Australian Financial Services

Licence. Providing a "financial service" includes being engaged in one of the following

five activities:

1. giving advice on financial products

2. dealing in financial products

3. operating a registered managed investment scheme

4. making a market in financial products

5. operating a custodial or depository service, or

6. engage in conduct prescribed by regulations.

The first step is therefore for a person to decide whether or not the products that a person is

providing a financial service in relation to, are caught by the legislation. The majority of

financial products are caught, including Life, General, Securities, Futures, Superannuation

and Managed Investments products, however the Act lists a number of specific inclusions

and exclusions, as to when a person will or won't be providing a "financial service" for the

purposes of these licensing provisions.

Specific inclusions include:

a security

a derivative

a managed investments scheme outside the jurisdiction that would be registered ifoperated within the jurisdiction

a contract of insurance (subject to some limitations)

certain superannuation interests

a retirement savings account

any deposit taking facility made available by an Authorised Deposit-takingInstitution in the course of its banking business (other than RSAs)

some foreign exchange contracts

This takes us to what is specifically excluded, including:

excluded securities

health insurance

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re-insurance

a credit facility within the meaning of the regulations and a facility for making non-cash payments if payments will be debited to a credit facility of this type

deposit-taking facilities used for State Banking

a funeral benefit

exempt public sector superannuation schemes within the meaning of theSuperannuation Industry (Supervision) Act 1993 (regulation 7.1.05)

surety bonds

bank drafts

and products that fit within the converse of included services such as managed

investment schemes outside the jurisdiction that would not be required to be registered,

contracts of insurance and life policies that fit within the limitations of the included

definitions.

Work that is done in the course of work of a kind ordinarily done by clerks and cashiers is

not the provision of a financial service.

A number of persons are exempt from having to hold a licence, such as:

authorised representatives of licensees or exempt persons

mere product issuers

the media where they provide general advice in publicly available publications,

subject to certain conditions

an APRA regulated body, where the services concerned are those for which APRA

has regulatory or supervisory responsibilities (not peripheral activities)

trustees of non-public offer superannuation entities, and trustees of pooled

superannuation trusts, provided the pooled superannuation trust does not invest the

assets of a regulated superannuation fund below a certain asset size

an employer who arranges for employee contributions to be paid into a

superannuation fund, or who gives information to employees about the fund

where the service consists only of a referral to a financial services licensee, as an

incidental part of the referrers ordinary activities, and where any benefit received

for the referral is disclosed to the referee.

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self-managed superannuation fund trustees, provided the service is provided in that

capacity, or

where the person is exempted under regulation or by ASIC.

When is a person advising?

For some of the financial services the Bill contains further definition. For example,

financial product advice is defined in relation to personal and general advice: the business

must therefore understand when their representatives are giving advice and whether this

advice is personal or general advice.

Looking at the first element, advice is "a recommendation, statement of opinion, or a report

of either of those things that is intended to influence a person in making a decision in

relation to a particular financial productor interest in a particular financial product, or

could reasonably be regarded as being intended to have such an influence." It does not

include anything in an exempt document.

A person will be giving personal advice if they consider any one or more of a person's

objectives, financial situation and needs, or who could be reasonably expected to have

considered one of these. General advice is advice that meets the definition of advice, but

does not meet the requirements for personal advice.

Some notable exclusions: an exemption if given for advice given by lawyers in the

ordinary course of activities as a lawyer, that is reasonably regarded as a necessary part of

those activities; insurance quotes, where the cost or estimate is based on the value of an

item suggested or recommended by the insurer; accounting activities undertaken by

qualified accountants, as long as they don't involve financial advice and some

circumstances where limited information eg on a product cost or return, is provided.

Advising is one of the main activities that will be licensed under the new regime and this

definition means call centres and bank tellers/counter staff will need to be carefully

educated about how to give correct advice, or at the least as to when their conversations are

crossing the line into general, and then personal advice.

What about dealing?

Dealing in a financial product includes issuing, varying or acquiring or disposing of afinancial product; applying for, acquiring of a financial product on behalf of another or

underwriting an issue of securities or managed investments. The definition of dealing also

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includes arranging for a person to engage in any of those activities. Working out the

difference between arranging and advising will be important, as additional obligations such

as training and some special conditions attach to a person giving advice, as opposed to

dealing.

Relief from the definition is provided to persons dealing on their own behalf, provided theyare not an issuer of financial products.

Many applicants will not wish to be authorised to provide a service in relation to all

financial products. The Act contemplates that you may obtain an authorisation to provide

a service in relation to a particular product or class of financial products. For example, you

may only want to be authorised to provide advice in relation to Life products only.

What obligations will licensees need to meet?

The fundamental premise is that a licensee will be able to provide financial services

efficiently, honestly and fairly.

But the law recognises that to provide the service in this way certain fundamental

obligations need to be meet including:

- appropriate measures to ensure compliance with the law and licence conditions

- appropriate measures to adequately monitor and supervise the people that represent the

licensee in the provisions of those services

- unless APRA-regulated, that the licensee has adequate non-financial and financial

resources to provide the service. This means the right systems, the right people and

enough money to do the job.

- that all representatives are adequately trained

- appropriate and working internal dispute resolution mechanisms and the licensee is a

member of an external dispute resolution scheme. The regulations include the matters that

ASIC is to take into account when considering whether to make or approve standards or

requirements relating to internal dispute resolution. The regulation also sets out the

matters ASIC is to take into account when considering whether to approve an external

dispute resolution scheme.

- and finally appropriate risk management processes in place and adequate compensation.

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These requirements are known as the necessary organisational capacities and ASIC has

issued policy to supplement the legislative requirements.

Can a licensee use an authorised representative?

Yes the legislation recognised that a licensee will operate through their "representatives".

The law contains a number of provisions relating to authorised representatives, which

represents a change from the proper authority holder, and agents and brokers systems

currently in use.

A person will only be able to provide a financial service on behalf of another in certain

circumstances, including where they are:

an employee or director of a licensee or related body corporate

an authorised representative of a licensees acting within the scope of their authority

an employee of an authorised representative, where the employee conducts limited

services such as provide basic deposit products

the holder of a licence covering provisions of those services, or

exempt from holding a licence.

The Act introduces some further changes for representatives:

bodies corporate can be authorised representatives

sub-authorisation is allowed where the authorised representative is a body corporate

and has the licensees consent to sub-authorise. Where the licensee authorises a

corporate authorised representative to sub-authorise, written notice of an

appointment must be given to ASIC and the licensee.

one licensee may by the authorised representative of another licensee in a binder

situation only

cross-endorsement is possible, but a person who wants to act as an authorised

representative of more than one licensee will need to obtain the consent of all

licensees, even if the services the person wants to provide are different for each

proposed authorising licensee. This is likely to mean a reduction in the number of

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licensees for whom a person can act, and may result in advisers moving to larger

dealers groups where they can offer a number of products.

What about liability for authorised representatives?

A licensee will be liable for the conduct of it's authorised representative:

in all circumstances where the representative acts for only that licensee

only for services covered by the licensee's authority, where the representative

represents a number of licensees, and

in all other cases jointly and severally with other licensees.

Where a lack of authority has been disclosed to the client, the licensee will not be

responsible for conduct outside that authority.

Licensees will be required to revisit the associations that it currently has to determine

whether all of these people should be authorised as its representatives under the legislation.

They will also need to determine the extent of any authority given, and how they will

monitor the conduct of these authorised representatives.

Licence Conditions

The regulations impose a range of conditions on Australian financial services licences.

These include conditions relating to:

notification to ASIC in relation to events that may make a material adverse change to

the financial position of the licensee (this condition will not apply to licensees that

are bodies regulated by Australian Prudential Regulation Authority);

notification to ASIC in relation to certain changes in details entered in the register of

financial services licensees and the register of authorised representatives of financial

services licensees;

the maintenance of a record of training undertaken by representatives; and

the supply of copies of authorisations of authorised representatives.

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In addition, ASIC is empowered to impose conditions on a financial services licence. It is

envisaged that ASIC may use this power both in applying various conditions in relation to

licensees generally and also in relation to particular classes of licensees.

What are the changes to Disclosure?

As you are aware the legislation introduces new disclosure requirements for products and

point-of-sale conduct.

Prospectuses for non-listed managed investment schemes will be replaced by the product

disclosure requirement. Key feature statements for life and superannuation industries will

also be replaced by product disclosure requirements. And the general insurance industry

for the first time will also be required to provide product disclosure statements.

The first issue to be addressed in the disclosure context is whether a licensee is dealing

with retail or wholesale clients with significantly greater requirements, both disclosure

and conduct, placed on dealings with retail clients. It is therefore very important to

understand the distinction between wholesale and retail:

the overall starting point is that a client is retail unless they fall within the

definition of wholesale client.

For the purpose of product disclosure, all clients to whom superannuation or RSA

products or services are provided are retail, including trustees.

Where the product is a general insurance product, such as motor vehicle, house

and contents, travel insurance or other insurance specifically listed, and it is

provided to an individual or a small business (as defined in the Act less than 100

people if manufacturing business and less than 20 people in any other case), the

client is a retail client. In the case of all other general insurances, the client is

wholesale (eg commercial insurance, PI cover).

Where the financial service does not involve the provision of superannuation, RSA

or general insurance products, certain clients will be considered wholesale if they

meet one of four tests:

The product-value test provides that a person is not a retail client where

they purchase a financial product, or a financial service related to a

financial product, and the value of the product is above the prescribed

threshold, to be set initially at $500,000. Regulations may modify the

application of the test where appropriate.

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The second test ensures that small businesses receive protection as retail

clients under the regime.

The third test considers individual wealth and provides power to make

regulations specifying the net assets or gross income that will be required

for a person to be a wholesale client, and

Finally, professional investors are always considered wholesale clients.

Generally, the disclosure requirements apply to retail clients and the conduct requirements

are more standardised: "know your client" requires givers of personal advice to

demonstrate knowledge of objectives, strategy and products appropriate for the client.

"Know your product" requires a provider to have done appropriate and adequate research

into the product.

The regulations require disclosure to be provided in the same manner that the advice is

provided. Therefore:

where advice is given orally, disclosure must be given orally;

where advice is given in printed or electronic form, disclosure must be given in that

form; and

where advice is given in any other form, disclosure must also be given in that form.

I'll now move on to consider the disclosure documents that are required at differing stages

of a transaction.

Financial Services Guide: What service am I getting?

The FSG is a document that is to be provided in almost every situation where a financial

service is provided and must be given to the client before the financial service is provided.

The FSG must be prepared by the person who will provide a financial service and must

contain sufficient information to enable consumers to make an informed decision about

whether to acquire a financial service. It includes specific information such as:

the name and contact details of the licensee

the kind of financial services the licensing can provide

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information describing the purpose and content of the FSG

if appropriate, the availability and purpose of a Statement of Advice or PDS in

addition to the FSG

information relating to remuneration, commission and other benefits paid to

persons who refer clients to the licensee, including specifically the amount, if

available at the time, or how it is to be calculated in a form capable of being

understood by the client, and

associations between the licensee and the product issuer than could influence the

licensee's recommendations

Where the FSG is provided by the authorised representative, additional information needs

to be provided such as the authorised representatives details, scope of authority, and

influencing associations.

An FSR is not required where the client already has an up to date FSG, the providing entity

is a product issuer dealing in its own products only or the providing entity operates a

registered scheme and the service they are providing relates to this only.

A supplementary FSG may be provided to update the FSG.

Statement of Advice: What advice am I getting?

The Statement of Advice is necessary when giving personal advice to a retail client. When

general advice is provided no SoA is necessary however the client must be advised that the

advice may not suit their circumstances, objectives or needs. The statement of advice can

either contain, or be, the advice and must be provided as soon as practicable after advice is

given and in all cases before the client is given any further financial services.

Similar to the FSG, the Statement of Advice must contain certain information and

statements:

a statement setting out the advice

information about the basis on which the advice is or was given. The person giving

the advice must have a reasonable basis for it, and warn the client if it is based on

incomplete or inaccurate information

a statement setting out the name and contact details of the providing entity

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information about remuneration, commission or other benefits that may be capable

of influencing the advice. The information regarding remuneration required to be

disclosed in the Statement of Advice is necessarily more specific than that required

under the Financial Services Guide. Generally, remuneration will need to be

disclosed as a dollar amount, but where this is not possible, a description of how

the remuneration is to be calculated, including, where appropriate, worked dollar

examples and percentage amounts, should be provided.

information about any other interests, pecuniary, direct or otherwise that may

influence the provision of advice.

There are additional requirements when advice recommends the replacement of one

product with another including charges the client may incur in respect of the disposal or

acquisition, any pecuniary benefits that may be lost and any other significant consequences

resulting from the changeover.

It is fair to say that what is to be disclosed will depend to a degree on the circumstances of

each particular case, and will call for some judgement on the part of the financial services

licensee (or authorised representative).

If an explanation of the activities or functions for which the remuneration is received

would assist the client to compare similar products or services offered by other providers,

it would be acceptable to disclose this. For example, it would be acceptable to disclose

whether part of the remuneration was used to pay for administrative costs, or the costs of

running an office.

A balance needs to be struck between providing the client with sufficient information with

which to make comparisons with products and services of other providers, while not

overwhelming or confusing the client by providing too much information.

Product Disclosure Statement: What product am I buying?

The PDS is to be prepared by or on behalf of the issuer or seller of the financial product

and must contain sufficient information so that a retail client may make an informed

decision about whether to purchase a financial product and to allow for comparison of

financial products. The information must be worded and presented in a clear, concise and

effective manner, and will include information such as:

Fees payable in respect of a financial product

Risks of a financial product

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Benefits of a financial product; and

Significant characteristics of a financial product

Another interesting inclusion in the PDS is the subject of a legislative provision, which

requires disclosure of "the extent to which labour standards or environment, social or

ethical considerations are taken into account in the selection, retention or realisation of the

investment". Arguably, if no consideration is given to these factors, disclosure of this fact

must also be made.

Part two of the amendment says "ASIC may develop guidelines that must be complied

with where a product disclosure statement makes any claim that labour standards or

environment social, or ethical considerations are taken into account in the selection,

retention or realisation of the investment". ASIC is giving consideration to guidelines in

this regard.

Generally, a PDS should be given to a retail client before a recommendation is made to

buy a financial product, an offer is made to issue or arrange the issue of a financial

product, or a seller makes an offer to sell the product if that sale requires disclosure.

In time critical cases, where the financial product is subject to a cooling off period or if the

product is a basic deposit product, then the issuer may give certain information orally

before providing the product without giving the full PDS. A full PDS must however be

provided not later than 5 days after the product is issued or sold or when the confirmation

requirement is complied with. The regulations allow a Product Disclosure Statement for

superannuation products to be provided later in certain circumstances, including the

provision of a Product Disclosure Statement for standard employer sponsored membersand members of non-public offer superannuation funds.

A PDS is not required in certain circumstances, including:

A recommendation, issue or sale situation where the client has either already

received an up to date PDS, or has access to an up to date PDS.

A recommendation or issue situation where the client already holds a financial

product of the same kind and the advice, offer or issue is made under a distribution

reinvestment plan or switching facility

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Additional contributions are made to an existing financial product eg to a

superannuation fund of which the client is already a member on the same terms

and conditions, or

Where no consideration is to be provided.

A supplementary PDS may be used to correct misleading info, omissions or update

information. Ongoing disclosure of material changes and significant events is also

required.

Product issuers and sellers who are required to prepare a Product Disclosure Statement

must hold any application money in an account for the applicant until the product is issued

or transferred or the money returned. The money must be paid into an account with an

Australian authorised deposit-taking institution, or of a kind prescribed by regulation

Cooling off period

I made mention earlier to a cooling off period which has previously not been available

under the Corporations Act. The cooling off period goes a way towards offering

protections to consumers that arguably were previously covered by the prospectus

lodgment and registration requirements. It is a 14-day period where the client has the right

to return the financial product to the responsible person and to have the money they paid toacquire the product repaid. The cooling off period applies, subject to some limitations,

where one of the following financial products is provided in the jurisdiction to a retail

client:

Risk insurance products

Investment life insurance products

Managed investment products

Superannuation products RSA products

and only where the product is provided to the person by way of issue or by way of sale

pursuant to an offer to which a product disclosure statement was provided.

The cooling off period does not apply in certain listed circumstances, which reflect, in part,

limitations on product disclosure provisions in the new Corporations Act and practical

difficulties in applying cooling-off provisions to certain financial products: for example,

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the cooling-off provisions cannot be inappropriately utilised to obtain a refund of

monies when the product has effectively been used (such as, travel insurance).

It can't be used to access superannuation related monies that are subject to

preservation requirements in the event of a transfer between superannuation entities

or retirement savings accounts.

There is also provision to vary the amount of monies to be repaid in the event a person

exercises their right of return of a financial product. These variations account for the

different nature of various types of products and certain liabilities or costs incurred in

relation to the issue and subsequent return of the financial product. For example, the

product holder is the party subject to market risk where the value of the financial product is

linked to the market. The cooling-off provisions can't be used by a product holder to avoid

market losses. Similarly, the product holder must meet any non-recoverable taxation or

duty liabilities associated with their acquisition of the product.

Provisions relating to Conduct other than financial product disclosure

Other provisions relating to conduct are also included in the Act and address obligations

attaching to dealing with clients' money, dealing with other property of clients, reporting

obligations and prohibitions on hawking of certain financial products and engaging in

unconscionable conduct.

ASIC Powers:

ASIC will have some discretionary powers under the Act with regard to both licensing and

disclosure, but we have applied a high benchmark and only those industry participants that

are subject to exceptional circumstances and where consumer protection will not be

comprised will beallowed relief.We have also been vested with a number of administrative powers including suspension,

variation and revocation of licences and banning orders against financial advisors. We can

impose stop orders for information in Product Disclosure Statements and there is a broader

range of conduct offences eg failure to notify of an alteration to a financial services guide.

Some offences are strict liability offences, such as a person failing to give a disclosure

document or failing to keep and provide copies or product disclosure statements, or

notifying ASIC the PDS is in use.

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In addition, there are a number of criminal and civil penalties, which will apply for specific

breaches eg where a person fails to give a client a disclosure document, resulting in loss to

the client, the client may recover the loss or damage.

Transitionals

The Act provides for a two year transitional period which means in general that existing

financial service participants will have until March 2004 to comply with most of the

provisions for their existing businesses. New participants will need to obtain a license to

provide new financial services. More detail on the transitional provisions will be discussed

later in this presentation.

Please remember that this is an overview of the legislative provisions and naturally does

not cover anywhere near the detail of the legislation. The Act itself contains some 550

provisions, plus the provisions of the consequential amendments legislation and

regulations. I am happy to discuss in more detail any of the provisions mentioned in this

overview.

Thank you thats where I would like to break with this session. Im more than happy to

take any questions you may have on the presentation up to this point.

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SESSION 2

Welcome back!

ASICs role, now that the legislation has passed, is fourfold. It is to:

1. Give full effect to the law through development of policy and processes

2. Facilitate transition

3. Conduct surveillance and enforcement

4. Educate consumers

In this phase leading up to commencement, our focus is naturally on implementation of the

legislation. In this session I will canvass our approach to implementation, transitional

provisions, as well as look at the exchange and clearing and settlement provisions of

FSRA.

Our approach to implementing the legislation has been, and is, guided by a number of key

principals. These are that we should:

Give full effect to the legislation enacted by the Parliament recognising that

this legislation is the result of detailed consultation with industry and consumer

groups over the last 4 years;

Develop policy that is consistent with the main objectives of the legislation, as

were discussed in the first session this afternoon;

Recognise that the new legislative framework changes how financial products

and services are regulated and that for some industries this change will be

greater than for others;

Provide guidance that will help people comply with their obligations under the

new regime;

Focus on administrative implementation of the legislation

Develop policies by working closely with those developing internal ASIC

systems and processes to implement the Act (such as those working on

development of application forms, IT systems and surveillance programs); and

Help consumers understand how we will implement the new legislative

framework.

Our task is to licence participants and to apply the disclosure and conduct requirements.We believe we need to assist market participants and consumers in understanding how

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ASIC will do so. We do this through Policy Statements, and Guidelines including

licensing kits.

Our Policy Statements give guidance, indicating how ASIC will administer specific areas

of the law and how we will exercise discretions and powers given to us. While these

statements do not have the force of law, industry participants have regard to our Policy

Statements in conducting their affairs.

We have set a framework for developing policy proposal papers, a process document for

how we will issue licences and a guide as to how our existing policies would be applied,

amended or replaced under the new Act. An initial framework document was released

with the first set of policy proposals in April this year, and a supplementary framework

was issued on 11 September, in response to the deferred commencement date of 11 March

next year. These framework documents together explain the interaction between the

proposed policies, policy statements and guidance documents, and are available, together

with the policy proposal papers on ASIC's website (www.asic.gov.au) if any of you would

like to take a closer look.

There are four stages to our publication timetable, and our releases are prioritised having

regard to industry needs. In essence, and keeping in mind the March 11th

start date, weaim to have issued by 1 December 2001 those policy publications that are most important

to implementing the FSR legislation:

1. Before 1 October:

a. Licensing Financial requirements Policy Proposal Paper

b. Adapting PS146 to the Financial Services Regime

c. Interim Policy on Approval of Codes

2. Before 1 November:

a. Licensing and Disclosure:

b. Transitional provisions guide and PPP (dependant on final FSR regulations)

c. Licensing process guideline on how to get a licence

d. Market operators PPP

3. Before 1 December:

a. Licensing

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Organisational Capacities Policy Statement

PS146 (training of financial product advisers)

Internal and external dispute resolution PS

Discretionary powers PS

Financial requirements policy

Advice and deal PS (subject to regulations)

b. Disclosure:

Product disclosure policy

Discretionary powers PS

Licensing and Disclosure transitional provisions policy (subject

to regulations)

4. Early 2002 (before FSR Commencement)

a. Discretionary powers related instruments for both Licensing and Disclosure

b. Market operations PS

c. Licensing kits and electronic applications (February)

Policy Proposal Papers are the first step in the policy development process and give a

proposed view as to how ASIC will interpret the law. But they are proposals only and are

issued for public comment and consultation. After going through the consultative processand making revisions where appropriate we then issue Policy Statements on the subject

matter.

Throughout the FSRA consultation process to date we have received over 75 written

submissions on our policy proposals for FSR. We have also conducted more than 30

meetings with various industry groups and companies to discuss the PPP's and take their

views. Whilst the response was generally positive on our process, it was not surprisingthat there were common themes among the issues highlighted by industry. Some

commentators considered that the PPP's were too prescriptive in definitional areas whilst

others considered in some areas the PPP's did not provide enough certainty to be of

assistance to industry. Clarification was required on a number of the policies, particularly

Advice and Deal and IPS146 (covering training of authorised representatives), suggesting

that the scope of the licensing regime and training requirements were likely to be two of

the biggest hurdles for industry to come to terms with.

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The areas that attracted most interest amongst commentators were, not surprisingly: How

do we become licensed, how will ASIC determine what is financial product advice,

training requirements and our views on the disclosure documents required under the

legislation. These are the policy proposals I intend therefore to focus on today.

Advice and Deal

Lets start with Advice and Deal We initially issued policy proposals on Advice and Deal

which sought to provide answers to difficult and controversial areas. We have altered our

approach on the basis that a number of these areas were considered better left to the

regulations to address and we now propose to issue a guidance document in lieu of a policy

statement. This enables us to take a more general approach to assisting industry, which

will provide guidance on issues that industry should consider in determining where they fit

within this licence structure.

For example, in determining the meaning of "financial product advice" our guide suggests

that consideration should be given to the character and context of the communication: does

the communication contain a recommendation, statement of opinion or a report of either of

these? Communications of factual information only do not involve the expression of an

opinion or recommendation we have suggested that factual information is information

that is objectively ascertainable, but have warned industry that selectivity may take acommunication out of the "factual information" category. Information is not objectively

ascertainable if its truth or accuracy could be reasonably questioned.

Context of the communication looks at whether the recommendation or statement of

opinion, or report of either of these is, or could reasonably be regarded as, intended to

influence a person to make a decision in relation to a financial product. We consider that it

is necessary to consider the means by which the provider is remunerated and anyrepresentations made to the consumer. For example, it is more likely to be advice if the

provider is remunerated by the consumer.

Dealing includes arranging for a person to engage in conduct that constitutes dealing. We

consider that the following factors tend to suggest that the conduct of a person providing a

service to a second person constitutes "arranging:

a. Where their involvement in the chain of events leading to the relevant dealing

transaction is of sufficient importance that without that involvement the transaction

would not take place;

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b. Where their involvement significantly 'adds value' for the second person;

c. Where their involvement in the chain of events leading to the relevant transaction

dealing is not merely passive

d. Where they receive benefits depending on the decisions made by the second person

For example, the activities of an order router would probably be "arranging", whereas the

operator of a business introduction service will probably not be arranging where the

operator plays a passive role and doesn't benefit from the investment.

Bearing in mind the obligations that rest with a licensee, this guide also provides factors to

assist with determining whether a person is acting as a principal or a representative.

Principals need to be licensed in their own right. Factors indicative of a person acting as

principal and not as a representative include:

If your conduct is monitored and supervised by someone else

If you give consumers the impression that you are acting as a principal

If your conduct is not covered by anyone else's compensation arrangements (eg

PI insurance)

If client assets are held in an account in your name

If clients are directed to pay any fees owing in relation to the provision of

financial services into an account in your name If you receive commissions directly from product issuers

If you have ownership of client information.

If you are a representative you will not cease to be a representative merely by handling

money as a conduit and you are able to produce and distribute your own business

documentation (business cards and letterhead) provided these documents make it clear you

act as a representative of a licensee, and the licensee is disclosed.

A specific liability issue which arises is how the obligations of a licensee operate where its

authorized representative (AR) employs a para-planner (PP), who is not authorized, to

assist in providing financial product advice to retail clients. For example, the PP may

engage in the following activities:

(a) collecting information directly from clients about their objectives, financial

situation and needs;

(b) preparing draft statements of advice (which identify the AR as the providing

entity, but do not include any reference to the PP);

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(c) assisting the AR in explaining these statements of advice in discussion with

the clients.

We consider that the licensee must have compliance measures in place that are designed to

ensure that the AR plays a material role in the provision of financial product advice to

retail clients (refer to the Organizational Capacities Policy Statement). If the licensee does

not have appropriate compliance measures in place, it will breach several duties, including

the duty to ensure that financial services are provided competently and honestly, the duty

to take reasonable steps to ensure that its representatives are complying with the law and

the duty to maintain the competence to provide the financial services. It would be

inconsistent with these duties for the licensee to allow financial product advice to be

provided under its licence without the material involvement of those persons who are

authorized to provide that advice.

The requirement for the AR to play a material role in the provision of the advice does not

mean that the AR must personally perform all the functions associated with the provision

of the advice. Rather, the AR must:

(a) review the draft statements of advice prepared by the PP with a view to

assessing whether all legal obligations have been complied with, and take

any necessary action to ensure such compliance (this may mean that the ARneeds to obtain further information from the client or may need to alter the

draft recommendation); and

(b) manage and lead any oral explanation of the financial product advice to the

client.

As a general rule, where there is disproportionately high number of unauthorized para-

planners being used by a licensees authorized representatives (compared to the number ofthe licensees authorized representatives), we believe that there is an increased risk that the

licensee will not be satisfying its obligations.

It is important to note that the licensee remains ultimately responsible for the financial

product advice provided by the AR (and the licensee will be liable to consumers if the

advice is defective) regardless of the extent to which the AR uses para-planners to assist in

the preparation of that advice.

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While the primary responsibility for the provision of financial services rests with the

licensee, authorized representatives and para-planners also need to ensure that they are

acting lawfully. For example, the obligations in Part 7.7 will be imposed directly on the

Authorised Representative as the providing entity. There is also a risk that the PP may be

breaching the law if the AR does not play a material role in the provision of the financial

product advice because it may be held that thePP (rather than the AR) is the person who is

providing the financial product advice.

Further regulations will be released before 11 March 2002 and it is possible that a number

of unresolved issues will be dealt with in these. When the final FSR regulations are

issued, we will review what, if any, policy guidance ASIC needs to issue on this subject,

taking into account that:

It is for the service provider to ultimately determine their obligations under the FSR

legislation and regulations, and

We need to strike a balance on the level of guidance we provide while ensuring we

accurately reflect the legislative intent.

Organisational Capacities

This policy statement will outline the minimum standards ASIC expects licensees to meetin order to comply with their key obligations and will continue to recognise that the FSR

regime is designed to work in a flexible way. It will confirm that licensees are responsible

for complying with the obligations the legislation places on them as licensees, including

deciding which way is the best for them to do so.

These obligations include having adequate compliance measures, sufficient financial and

non-financial resources; organisational expertise and skills; adequate risk managementsystems and adequate ongoing internal assessment and monitoring arrangements. What is

required of a licensee to comply with the law will vary according to the nature, scale and

complexity of the business the licensee carries on. In many cases there may be a number

of ways for licensees to comply with what the law requires. In the way we administer the

legislation consistent with this policy, we will seek as far as possible to retain this

flexibility.

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The key message in this policy proposal is that we see the implementation of appropriate

compliance structures, including reporting and monitoring systems, as being necessary to

meet licensee obligations to provide a financial service efficiently, honestly and fairly.

In summary, this means that the licensee needs to know whether or not they are complying

with the law and with their licence and when a breach occurs that they take the necessaryaction to rectify the breach in a timely manner and address any systemic issues

appropriately. For example, a licensee will need to know whether the people who are

providing advice to his or her customers are meeting their obligations under the law to

provide a statement of advice. If one of these advisors is not meeting this obligation the

licensee will need to do something about it. But also the licensee will also need to make

sure that their advisors are giving appropriate advice and will need to put measures in place

to test this eg by having somebody pretend to be a client or mystery shopper.

The policy proposals go into some detail about the different outcomes we are seeking in

relation to some of the more specific requirements under the licence. Our aim in this part

was to give enough guidance as to ASIC's expectations. For example, we go into some

detail about what adequate compliance measures are. These follow the Australian

Standard 3806 on compliance structures, but again they are to be applied flexibly. Our

direction on compliance is an important place to start as it underlines how you will need to

comply with each compliance regulation.

Monitoring, supervising and training of representatives are vital for all licensees to

understand. We outline minimum requirements that must be put in place including

documented reporting structures and a system to supervise activities. In line with

compliance methodology there must also be documented procedures for taking disciplinary

action when non-compliance occurs.

Organisational expertise is another important area covered in this policy proposal. It sets

out what we believe are the minimum educational and experience qualifications required

for licensees: it explains who we believe should have those qualifications and we outline

the kinds of qualifications and experience we think are relevant. The outcome we are

seeking is a balance between technical knowledge and experience as well as management

know-how.

We outline what we think are the risk areas in satisfying the adequate non-financial

resources requirements and points to consider as to whether the licensees resources are

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adequate. For example, one measure may be the response times of your IT system or

complaints from staff about the adequacy about the IT system.

For guidance on risk management we have looked at the Australian Standard on risk

managements systems and outlined some of the fundamentals of identifying, prioritising

and managing risks. We do not expect that all risks are addressed addressed 100% but weare saying that each risk needs to be looked at and addressed appropriately.

Accepting that anyone giving financial product advice needs to be licensed or authorised

by a licensee, a licensee is responsible for ensuring that its representatives are properly

trained and supervised guidance on this general obligation will be set out in our

organizational capacities policy statement also. The finally adapted PS146, intended to be

issued before 1 December will contain explicit training standards that must be met by

representatives of licensee who provide retail advice.

IPS146

In recognition of the different kinds of licence we have limited PS146 to the provision of

retail product advice only, rather than all licence activities. We have done this because we

believe the law, with its requirement that all licensees must train their representatives

adequately, is enough at this time.

This policy will continue the two- tiered approach currently adopted for training of

authorised representatives but we have clarified tier two. We believe that most people

providing financial product advice need to be trained to a tier one level. The interpretation

of what constitutes financial product advice we believe excludes many clerical and

administration activities that many industry players have determined as being advice. But

we also recognise that some products have become commoditised and as such only limited

(tier two) training is required. This includes your general insurance products and basic

deposit products.

We have also recognised that training courses entered into prior to 1995 may not have the

content to meet today's requirements and as such these courses will not be automatically

recognised.

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Most general insurance products fall within Tier 2, including motor vehicle, home and

contents, travel and personal and domestic property insurance. We have restricted the

lower Tier 2 level of training to people advising on these products because they are

relatively straightforward, don't have an investment component, are subject to terms and

conditions and are of limited life (often 12 months). We have also applied the Tier 2 level

to those who provide advice about basic deposit products and facilities for making non-

cash payments such as smart cards, cheques and traveller cheques. This is because these

products are also relatively straightforward and well understood by the public.

There are some insurance products that are not considered Tier 2: insurance products

covering consumer credit, sickness, accident or disability - this is because the choice made

about these products has or may have an increased potential to significantly impact on a

client's financial situation. Greater reliance is therefore placed on the adviser's competence

for advice on these products. In addition, our regulatory experience has led us to conclude

that a higher standard of training is required to advise on these products.

The recognition of pre 1995 training is a hot issue with the industry. We continue to

consider that training undertaken before 1 January 1995 would generally need to be

supplemented but we do recognise that many industry people have undertaken further

training post 1995.

We have now confirmed that an advisor with pre 1995 training will not have to undertake

gap training where:

The adviser has continued to work in the industry; and

Either:

a. Is a member of a recognised professional association relevant to the

financial services industry that has a formal requirement for ContinuingProfessional Development and the adviser has obtained the relevant points

(NIBA of course meets that requirement)

b. Where the above does not apply, undertook continuing training by regular

attendance at workshops or courses relevant to their advisory activities and

regulatory obligations.

Alternatively, an adviser with pre 1995 qualifications can demonstrate their current

competence by undergoing individual assessment. We intend to further clarify this policy

before the end of the year.

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Financial requirements

The financial requirements Policy Proposals Paper was issued on the 21st September. This

policy proposal paper canvasses proposed requirements that will apply to Australian

financial service licensees depending on the functions carried out by the licensees. These

include a cash flow proposal for most licensees, and a net tangible asset proposal for

custodians or depositories.

A licensee regulated by APRA is not subject to ASIC's financial requirements as those

licensees must satisfy APRA's financial requirements instead.

The base level requirements on the licensee are:

i. Positive net tangible assets (NTA) and solvent

ii. Have sufficient cash resources to cover 3 months based on unfavourable

assumptions

iii. Audit compliance annually and when ASIC asks

iv. Adequate risk management system including addressing financial risks.

ASIC intends to consult separately on the appropriate additional financial requirements for

licensees who have direct financial obligations to clients. This will typically apply to

dealers who enter into financial product transactions with (rather than on behalf of) clients.

ASIC will also consult separately on financial requirements for licensees who hold more

than $100,000 of client money or assets.

We have received a number of submissions on this paper: the general broking industry

strongly object to the 3 month cash flow requirement, arguing it is not appropriate for an

intermediary, is costly and of no value. There is also confusion as to how it applies and wewill work to clarify this over the next short period.

Disclosure (PDS)

There were varying industry views on whether ASIC should give guidance on compliance

with the PDS provisions of the Act. We decided to issue guidance to promote the

objectives of the Act and to share our experience in disclosure of important topics, such as

risk, fees and benefits. The policy addresses:

what we consider to be the key objectives of the PDS provisions

what we consider to be good process in developing PDSs

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good disclosure principles that a product issuer should consider

guidance on potential misleading and deceptive disclosure

examples of good disclosure outcomes.

The "good disclosure principles" that a product issuer should consider are:

1. disclosure should be timely;

2. disclosure should be relevant and complete;

3. disclosure should promote product understanding;

4. disclosure should promote comparison;

5. disclosure should have regard to consumers needs; and

6. disclosure should highlight important information.

We have suggested that the proposals may be adaptable to other disclosure obligations

under the Act eg those relating to the FSG and SOA.

Approval of Codes

On the consumer protection front, ASIC is vested with a code approval responsibility. We

recognise the potential role of Industry Codes and in this policy discuss what we consider

is the nature of a Code and the criteria by which we will consider approving a Code. We

have also considered the harmonisation of Codes, administration of Codes and their

ongoing status, if any.

External and Internal Dispute Resolution Procedures

A licensee is required to have approved internal and external dispute resolution procedures.

The factors ASICmust consider whenassessing a scheme for approval include whether the

scheme meets the Australian Standard on Complaint Schemes.

TRANSITIONAL ARRANGEMENTS AND THE APPLICATION PROCESS

The two-year transitional period to March 2004 means that we will be dealing with

industry across all stages of the licensing process including administering two regulatory

regimes.

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A number of transitional provisions have been included in the consequential provisions

legislation to explain how entities will be regulated through the transitional period. Here's

how it will work:

New financial services providers will generally need a licence to provide financial

services from the date of commencement.

Existing financial service providers will have up to the full two years to transition

provided they continue to only provide services that they are allowed to provided

under their current Corporations Act license or authorisation.

Many businesses will have a mixture of different regulated activities and could be

caught by both regimes.

The transitional provisions provide for streamlining licence applications according to

whether an entity currently holds an ASIC license, whether any variation of business, or

restructure of the business is intended going into the transitional period and whether the

business is FSR compliant. New entrants or those who were previously unregulated will

need to apply through the full licensing process. Streamlining is not a shortcut to

compliance with the law, but rather provides a means of licensing that means less

paperwork for compliant entities. The transition period for any particular licensee ends

when they either receive and AFSL, or start to engage in activities that are outside their

"regulated activities" (and therefore need an AFSL).

As soon as a licensee transitions to the FSRA, all of their authorised representatives will

also be caught by the FSR regime, including the licensee obligations and disclosure

requirements. For example, by becoming covered by the PDS provisions of the legislation

you not only need to meet the PDS requirements, but all of the PDS requirements such as

timing, situations when a PDS is required apply as soon as the product becomes regulated

under FSR. This means internal sign-off obligations apply and anyone distributing alicensee's product will be caught once they have that PDS in their hands regardless of

whether or not they are licensed or caught by any other FSR provisions.

This means that licensees will have to think strategically about how and when they

transition, considering their own circumstances in each case.

To assist with licence applications, ASIC has issued a process-related publication: How do

I get an AFSL? This guideline is intended to provide applicants with as much information

upfront as possible to smooth the application process for a FSL and to ensure that the

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standard of applications is high: incomplete applications will be rejected. The current

public version of the process guideline reflects our present thinking on how the application

process will operate; but will be reviewed and finalised in light of transitional provisions

and the relevant regulations, when available. Later releases of the process guideline will

include details of new standard licence conditions and information as to what happens to

your existing license or registration.

In addition to providing general information on the application process, the guideline

describes possible AFSL structure maps considering the class of financial service or

particular service, class of products and particular financial products. We will also be

issuing a licensing application kit, which are a detailed guide about the application.

Our licensing process has been developed to encourage electronic applications and

electronic maintenance of licensee information.

Impact on industry

We believe there will be broadly three types of industry involvement. Firstly, those

entities currently licensed by ASIC: they are used to the licensing approach, dealers are

aware of the need to document and demonstrate competencies and brokers registration is

diligence based. There is an awareness of conduct requirements and they are used to

ASICs policy approach. Dealers are used to registration, but brokers are not. Dealers, in

particular are used to ASIC's use of remedies, particularly the banning order.

Secondly, there are those entities regulated by other agencies - these bodies will need to be

licensed by ASIC as well. For example, a life company is prudentially regulated by

APRA, but will need to also be licensed by ASIC for financial services provided to

consumers. Dual or multiple regulation raises potential for confusion, duplication and

resistance, which means the policy, and procedural approaches will need to be clearly

articulated. The FSRA does accept some APRA standards eg risk management systems.

Finally, we have those industries that are new to ASIC regulation and have never been

licensed before, such as custodians. They are unaware of competency based assessment,

ASIC's policy approach, licensing obligations and registration of representatives (where

applicable). Conduct and disclosure requirements are new to them and they are likely to be

the ones requiring most assistance from ASIC.

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It is obvious to us that certain industries will transition more smoothly than others. The

transition period will be a time of significant change management for industry. The new

AFSL introduces a host of new issues for industry:

The need for licensing means that entities must review their structure, distribution

channels, technical and IT capabilities and consider outsourcing possibilities.

Industry must overcome any resistance to the extent of disclosure required and

focus on familiarity with the new products.

Training and compliance must be conducted properly to ensure consumer needs are

being met

There will be impact on the products changes to method of advice, product

structure, bundling and unbundling.

You have probably heard enough about the Australian Financial Services Licence for now

this part of the legislation initially attracted ASIC priority attention due to the large

number of industry participants affected. We knew that industry would have a level of

expectation regarding ASIC guidance in meeting the new regime: some will transition

much easier than other players.

FINANCIAL MARKETS AND CLEARING AND SETTLEMENT FACILITIES

A no less important aspect of the FSRA is that part affecting financial markets and clearing

and settlement facilities. As promised earlier I will now address these provisions.

What are the objectives of the Act for financial markets and clearing?

The Act introduces new regimes for the regulation of financial markets and clearing and

settlement services. The old Law had a number of limitations, particularly due to narrowdefinitions of the types of financial products, which affected the ability of financial

markets to trade new products. It also regulated under different provisions the same types

of financial products. FSR aims to allow for market developments; adaptation and

competition. One means the legislation uses to achieve this aim is through the introduction

of a flexible licensing regime. This allows conditions to be imposed in a licence issued to

a financial market operator or a clearing and settlement facility operator that address

specific regulatory issues relating to the operation of that market or clearing and settlement

facility.

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The regulatory approach is to impose obligations on operators of relevant facilities as high

level objectives. At the highest level the stated objects of the legislation in relation to

markets and clearing and settlement are to promote:

(i) fair, orderly and transparent markets for financial products; and

(ii) the reduction of systemic risk and the provision of fair and effective services by

clearing and settlement facilities.

The Act permits regulations to be made dealing with a range of specified matters, such as

the content of an application for an Australian market licence. The conditions of a licence

will also affect the way in which a facility and the operator are to function.

Who is responsible for regulation of financial markets and clearing and settlement?

Unlike the position of the providers of financial services where it is ASIC which issues

licences and varies licences, it is the Minister for Financial Services that will be

responsible for the issuing of licences to operators of financial markets and clearing and

settlement facilities. ASIC nevertheless has a key role in providing advice to the Minister

in relation to any matter that the Minister has a discretion under the Act and any othermatter concerning financial markets. ASIC will assess applications for licences and

amendments to operating rules for a financial market or a clearing and settlement facility.

ASIC is also responsible for the enforcement of the relevant provisions of the Act.

ASIC will be releasing policy proposals on how it intends to perform its role in relation to

markets in the next few days.

The legislation recognises the importance of clearing and settlement arrangements to the

overall economy. In Australia, the Reserve Bank of Australia in addition to performing the

role of the central bank is also responsible for maintaining financial stability and enhancing

the safety and efficiency of the payments system. The Act specifically recognises a role

for the Reserve Bank in dealing with systemic risks involved in clearing and settlement

facilities.

The legislation in relation to clearing and settlement facilities allows the Reserve Bank to

set financial stability standards and to monitor compliance with those standards. ASIC will

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monitor compliance with all other obligations imposed on operators of clearing and

settlement facilities. In addition, ASIC is empowered to take action to enforce all

obligations imposed on operators of clearing and settlement facilities. The Reserve Bank

will request ASIC to take action in relation to those matters where it considers action is

warranted.

ASIC must do an annual assessment of at least the manner in which the market operator is

performing its supervisory obligations. ASIC may also choose to do a written assessment

of how an operator is performing one or more of the obligations under Chapter 7 of the

Act. The Reserve Bank of Australia must also assess those matters that are relevant to

systemic stability.

What is a financial market?

Central to the regulation of financial markets under the Act is what is a financial market.

The expression "financial market" is widely defined to avoid the potential for avoidance. It

is defined in the Act as a facility or place where financial products may be acquired or

disposed or invitations and offers for financial products may be made. "Facility" is not

defined in the Act. Explanatory material to the Act confirms that there are someboundaries to the definition, for instance it does include a facility that merely involves

operating an electronic means of communication or an Internet service provider.

In practice the key feature of a financial market under the Act is that there is multi-lateral

dealing between counterparties on the facility. Facilities that involve the direct negotiation

between parties who each accept the counterparty credit risk will not be regulated as a

financial market.

There are a number of express exclusions from the definition of financial market,

including:

(a) conducting treasury operations between related bodies corporate;

(b) conducting an auction of forfeited shares; and

(c) any other prescribed conduct.

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The range of activity in conducting a financial market may also involve the market

operator in dealing. The Act specifically addresses this situation by exempting a financial

market operator from holding an AFSL for financial services provided incidentally to the

operation of a licensed financial market.

Why is an Australian market licence required?

To protect Australian investors the Act contains the principal prohibition that a person

must not operate a financial market in Australia unless the person is licensed to do so or

the financial market is exempt. The legislation empowers the Minister to exempt markets,

from the regulation under the Act. The parliament has indicated that exemptions should

only be given in very limited cases.

When is a financial market operated in Australia?

One key facet of the regulation is that the financial market must operate in Australia. The

legislation indicates that financial market operators that are incorporated in Australia are

operating a market in Australia if the market is conducted either in Australia or elsewhere.

The provision is not intended to catch electronic markets operated overseas that areaccessible by one or few people in Australia.

A person who is proposing to conduct a financial market in Australia will need to obtain an

Australian market licence.

The main existing financial market operators, presently regulated as exchanges under the

existing law will be issued with an Australian market licence in respect of the activitiesthat they presently conduct from the commencement of the Act. For people wanting to

conduct a financial market in Australia after the Act commence will need to apply for an

Australian market licence before they can commence their activity.

How to apply for an Australian market licence

Only a body corporate may conduct a financial market under the Act. The Act,

supplemented by the regulations details the information and documents that must be

provided as part of an application for an Australian market licence. These requirements

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focus on information and documentation that substantiate the ability of the market operator

to perform its obligations as an Australian market licensee.

ASIC will consider the material provided as part of the application and give to the Minister

the application along with its advice as to whether the licence should be issued. This will

include suggested conditions for the Australian market licence.

There are two types of applications for an Australian market licence. First, an application

by a person who is in Australia wanting to operate the market in Australia. Second, an

application by a person who operates a financial market outside Australia but wants to

operate that financial market also in Australia.

When an Australian market licence may be granted

To issue an Australian market li

Financial Services AUS

Documents

Transcript of Financial Services AUS