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CORPORATIONS REGULATIONS (AMENDMENT) 1998 NO. 161
EXPLANATORY STATEMENTStatutory Rules 1998 No. 161
Issued by the Authority of the Treasurer
Corporations Act 1989
Corporations Regulations (Amendment)
Section 22 of the Corporations Act 1989 (the Act) provides that the Governor-General may make regulations, not inconsistent with the Act or the Corporations Law (the Law), prescribing matters required or permitted by the Law to be prescribed by regulations, or necessary or convenient to be prescribed by regulations for carrying out or giving effect to the Corporations Law.
Sections 780 and 781 of the Corporations Law provide that a person who operates a securities dealing or investment advice business must be licensed by the Australian Securities Commission (ASC) unless exempt under sections 68 and 77(4), (5) and (6). The ASC only grants licences after consideration of the requirements of the Law which relate to solvency, educational qualifications and experience, good fame and character, honesty, efficiency and fairness (s.783 and s.784). Section 786 of the Corporations Law specifies that a licence is subject to the conditions and restrictions as are prescribed.
The purpose of the proposed regulations is to prescribe certain licence conditions which give effect to the recommendations made by the ASC in its 1995 report: 'Good Advice, Licencing Review of Investment Advisory Services'. This report examined regulatory issues relating to investment advisers in response to criticisms regarding the standard of investment advice available and in response to developments in the financial services sector and the investment advisory industry. The regulations propose that licensees who give investment advice be required to provide retail investors with information to facilitate informed decision making. This in turn will enhance investor protection and promote market integrity and efficiency.
Details of the regulations are contained in the Attachment.
ATTACHMENT
Proposed Regulation 1
Regulation 1 provides that the regulations commence on 1 October 1998.
The effective commencement date for the Regulations is 1 October 1998 which will ensure that persons subject to these Regulations will have sufficient time to put systems in place in order to meet their obligations under the Regulations by the commencement date.
Proposed Regulation 2
Regulation 2 provides that the regulations amend the Corporations Regulations.
Proposed Regulation 3
Regulation 3 includes three new provisions which prescribe licence conditions for dealers and investment advisers.
Regulation 7.3.02B -Investment Advice to Retail Investors
Subregulations (1) and (2) provide that a licensee who gives investment advice to a retail investor, must give that investor an Advisory Services Guide (ASG). Where the advice is given by the licensee to the investor in person, the ASG must be given either before or at the time of giving that advice. In all other cases, the ASG must be given to the retail investor as soon as practicable after giving the advice, however, if the advice is execution related telephone advice the ASG cannot be given any later than three days after the trading following the advice.
'Execution related telephone advice' is defined in subregulation (10) as investment advice that relates to quoted securities given by a stockbroker or other dealer as an integral part of the execution of a transfer of, or order for, those securities and for which no fee is charged in addition to the commission for the execution of the transfer or order. This is intended to confine such advice to situations where execution of the order or transfer is time critical and clients' expectations match the type of service provided.
Subregulation (3) provides that an ASG will not need to be given to retail investors if one has already been given to the investor for previous advice. This, however, is qualified by subregulation (7) which requires a licensee to provide a retail investor with an updated ASG where there is a change in the information specified in subregulation (6) contained in the original guide and the relationship between the licensee and the investor is continuing or the licensee has a reasonable expectation that the investor will seek further advice. In these circumstances, the updated ASG must be given at the earliest practicable opportunity after the change.
Subregulation (3) also provides that in the case of 'general securities advice' (as defined in subregulation 7.3.02D(10)) an ASG is not required where the advice is given to persons generally in a non-personal context (for example, by way of investment seminars, by means of brochures or newsletters or through advertisements) and at the same time the warnings specified in regulation 7.3.02D are also given.
Subregulations (4) and (5) require a licensee who provides investment advisory services to retail investors to be a member of an external complaints resolution scheme approved by the Commission and to have in place internal complaints handling procedures which are in accordance with Australian Standard AS 4269-1995.
As available financial products are becoming increasingly complex, the ASG must contain information which will allow retail investors to understand the nature of the services provided by the licensee. Proposed subregulation (6) therefore requires the ASG to contain information that a retail investor reasonably requires to:
(i) clearly understand:
* the nature of the investment advice service being offered;
* the method and extent of charges for that service; and
* his/her basic rights in relation to the licensee and representative regarding the advisory service offered;
(ii) compare the advisory service offered by the licensee to similar services offered by other licensees;
(iii) clearly identify the licensee or client adviser who is a representative of the relevant licensee who is responsible for the advice; and
(iv) utilise an external complaints resolution scheme and internal complaints handling procedures in the event of any dissatisfaction with the advisory services obtained.
The licence conditions apply where licensees are advising 'retail investors'. Subregulation (8) defines 'retail investor' as a person other than:
(i) a holder of a dealers or an investment advisers licence (or their representative) or an exempt dealer or investment adviser;
(ii) body corporate registered under the Life Insurance Act 1995;
(iii) a bank as defined in section 5 of the Banking Act 1959 or a bank constituted by or under a law of a State or Territory;
(iv) a trustee of a superannuation fund, an approved deposit fund or a pooled superannuation trust within the meaning of the Superannuation Industry (Supervision) Act 1993 that has more than 100 members;
(v) a trustee or management company of a prescribed interest scheme which has net assets of not less than $10,000,000 and more than 100 members;
(vi) a trustee or management company of prescribed interest schemes where such trustee or management company has aggregate funds under management of not less than $50,000,000 provided in relation to each scheme under management there is:
* no less than $10,000,000 funds under management; and
* no less than 50 members;
(vii) a financial institution, building society or credit union under the Financial Institutions Codes or a friendly society under the Friendly Societies Codes and legislation;
(viii) an exempt public authority as defined in section 9 of the Corporations Law;
(ix) an investment company as defined in subregulation 7.3.12(2);
(x) a listed company or a company which is a large proprietary company at the deadline for the last financial year or at the date of receiving advice from the licensee; and
(xi) a foreign entity which, if established or incorporated in Australia, would be one of the above.
Subregulation (9) allows a person who is a holder of a dealer's licence, an investment adviser's licence, or who is an exempt dealer, an exempt investment adviser or who is a related body corporate of a listed company to request, in writing to the licensee, that the licensee treat that person as a retail investor. A person who has previously elected to be treated as a retail investor can request that he/she no longer be treated in this capacity.
Regulation 7.3.02C -Personal Securities Recommendations to Retail Investors
Subregulation (1) provides that licensees who give personal securities recommendations to a retail investor who declines to provide sufficient personal information must warn that investor:
* that the adviser has not been able to undertake a comprehensive analysis of the investor's investment objectives, financial situation and particular needs;
* about the limitations on the appropriateness of the recommendations resulting from the absence of, or limited, personal information about the investor; and
* about the need for the investor to consider the appropriateness of the recommendations in light of the investor's own individual investment objectives, financial situation and particular needs.
Regulation 7.3.02D - General Securities Advice to Investor or Prospective Investor
Subregulation (1) provides that licensees who give general securities advice to retail investors must warn the investor that:
* the advice has not been prepared by taking into account the particular investment objectives,
financial situation and particular needs of any individual person; and
* as a result, the investor should, before making an investment decision on the basis of that
advice, assess (either individually or through the assistance of an adviser) whether it is
appropriate in light of individual investment objectives, financial situation and particular needs.
Subregulation (2) provides that if general securities advice is given in a written document, the warnings should be contained in the same document.