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13 November 2001
The Financial Services Reform Act 2001 has been enacted and will come into force on March 11 2002, although some parts of the act came into force on September 27 2001.
The regime is designed to be flexible. The act may be modified by regulations and by the policies of the Australian Securities and Investments Commission (ASIC). The draft regulations and ASIC policy proposals released so far are extensive. It is anticipated that they will be finalized by the end of 2001.
The following changes will apply under the new regime:
Consumers are expected to benefit from the reforms as a result of a more consistent application of protective measures in respect of, and facilitation of comparisons between, financial products.
For some financial services providers compliance costs will be lower under the new regime. However, a number of providers will need to be licensed for the first time.
Specific products included in the definition are securities, derivatives, many types of insurance contracts, most superannuation products, interests in registered managed investments schemes. Products specifically excluded are generally subject to other regulatory regimes.
Financial services licences may be issued by ASIC. On ASIC's advice the finance minister may issue the other types of licence.
Only the holder of an Australian financial services licence may do any of the following:
Even if a person has no permanent establishment in Australia but engages in conduct intended to induce people in Australia to purchase a financial product or service (or engages in conduct that is likely to have that effect), they will be taken to carry on business in Australia and will require a licence, unless they qualify for an exemption.
Providers of depository or custodial services will generally be financial services providers and will require a licence, unless otherwise exempted.
Certain persons who are not themselves licensed may provide financial services on behalf of licensees, including the following (subject to conditions):
Under the new regime a licensee may be liable for what its representatives do, even if they also represent another licensee.
Significant requirements with which a financial services licensee must comply include the following:
A person who operates a financial market must hold an Australian financial market licence unless an exemption applies to the particular market in which he or she operates. Such a person will be the primary regulator of the conduct of participants in that market, and is required to ensure that the rules and procedures of the market are (and the manner of their enforcement is) consistent with fair, orderly and transparent trading. They must also make adequate arrangements to handle conflicts of interest.
Operators of clearing and settlement facilities must hold an Australian clearing and settlement facilities licence unless an exemption applies to the particular facility he or she operates. The primary obligations of such a person are as follows:
Financial services licensees will need to determine whether they are dealing with a retail or wholesale client. Generally, if financial services are provided to retail clients the provider must follow the new disclosure rules, which are uniform in respect of all financial products and their providers. They replace the previous system, where different disclosures were required for different products and different types of licensees were subject to different rules.
The principal requirements of the new regime are as follows:
The regime also imposes obligations in respect of periodic reporting, the provision of transaction confirmations, dispute resolution, advertising and cooling-off periods.
Subject to exceptions, there is a presumption that a financial product or financial service is being provided to a retail client.
In respect of financial products (other than insurance or superannuation products), it is presumed that the product or service is being provided to a retail client unless one of the following exceptions applies:
Effect of the Reforms on the Securities Industry
As a result of the Financial Services Reform Act 2001, offers of securities will continue to be governed by the current disclosure document regime (or exemptions from it) in Chapter 6D of the Corporations Act, subject to some minor changes. All other financial products will be governed by the new disclosure regime, which will largely apply only in relation to dealings with retail clients, unless a financial services provider has chosen to comply with the regime in relation to its dealings with all clients.
Current holders of dealers licences and investment advisers licences will generally need to obtain a new Australian financial services licence. A two-year transition period applies. However, persons who currently need no licence but who must become licensed under the new regime must do so by March 11 2002.
To ensure compliance with the new law it will be necessary for providers of financial services to review and, where necessary, revise their systems and administrative procedures, marketing materials, training programmes and arrangements with authorized representatives.
The materials contained on this website are for general information purposes only and are subject to the disclaimer.
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