In brief - Financial service providers (FSPs) must be aware of current legislation and regulations
It is vital for FSPs to stay up to date with changing legislation and regulations and to be aware that ASIC has the power to grant relief in circumstances where the FSP may technically be in breach of the Corporations Act 2001 (Cth).
ASIC's power to grant exemptions from the operation of the Corporations Act
The Australian Securities and Investments Commission (ASIC) recently published its up-to-date decisions dealing with its "relief power". The "relief power" is ASIC's ability to grant exemptions or modifications to the operation of the Corporations Act. It may also provide relief under certain parts of the National Consumer Credit Protection Act 2009 (Cth) and its contingent laws.
ASIC's most recent findings were publicly released last month and are available online at Report 371: Overview of decisions on relief applications (February to May 2013) (ASIC Report). The ASIC Report is designed as a "roadmap" of recent issues that have come to its attention and mostly relates to statutory breaches.
Complexity of laws governing financial service providers
For many Australian financial service providers (FSPs), there can be difficulties in uncovering just how the current law affects their business (the 2013 corporations law suite is over 2,300 pages long). Some problem areas include:
• How to market and publish while complying with the law
• How to manage client relationships appropriately
• Best measures (or appropriate measures) for providing formal and informal financial services to clients
• What legal boundaries exist for advisers, product providers and lenders
Relief granted to FSPs between February and May 2013
From February to May of 2013, ASIC dealt with 875 applications from various applicants including small, medium and large FSPs. It granted relief in 425 applications. In its review, the main areas of relief that ASIC dealt with were:
FSP licensing relief — licence approval compliance, remuneration issues and risk insurance. In one case, relief was granted in some circumstances where remuneration arrangements would otherwise be a potential breach of the Corporations Act.
Disclosure relief — relief to companies involved in initial public offerings (IPOs), restructures and employee share schemes. Certain relief was granted where, for instance, shareholders on-sold shares without disclosure after an IPO, though only in certain circumstances.
Managed investment relief — relief for persons affected by hardship, buy-back schemes and various compensation arrangements or schemes. For instance, relief was rejected by ASIC in two instances where the responsible entity was an illiquid managed investment scheme attempting to allow investors to withdraw funds on hardship grounds.
Mergers and acquisitions relief — relief for IPO-related issues, shareholder rights and buy-back difficulties. ASIC allowed one private company to undertake a tender-style buy-back of shares without shareholder approval.
Conduct relief — no decisions were made, but ASIC published guidance on the issue in Regulatory Guide 248 - Litigation schemes and proof of debt schemes: Managing conflicts of interest and Report 338 — Response to submissions on CP 185 Litigation schemes and proof of debt schemes: Managing conflicts of interest.
Credit relief — no decisions were made, but ASIC again published guidance in Report 330 — Review of licensed credit assistance providers' monitoring and supervision of credit representatives.
Miscellaneous relief — the need for FSPs to issue new statements of advice to existing clients of FSPs. It was decided that in certain circumstances, a new statement of advice was not required where advisers were switching dealer groups, which decision will be important for advisers moving to new Australian Financial Services Licence holders.
FSPs need to educate themselves about the new laws and seek guidance
The information set out in the ASIC Report is highly specific and, for someone without time to read it, could go unnoticed. However, although it is dense and contains technical language, the ASIC Report is designed to educate the market and provide some guidance. Such education is sorely needed.
Since the introduction of the Corporations Amendment (Future of Financial Advice) Act 2012 (Cth) and the Corporations Amendment (Further Future of Financial Advice Measures) Act 2012 (Cth) (FOFA), the Australian financial industry will need to self-educate or seek guidance across the market. The industry itself has been visibly rallying in an attempt to adjust to or oppose the government's FOFA regime.
Licensing, product standards, advertising, disclosure and dispute resolution
In the author's view, FOFA itself calls for both a broad and specialised industry focus on major issues such as:
• Licensing measures and compliance
• Meeting dispute resolution regulatory obligations
• Targets for adviser and product standards (there can be pitfalls in relying upon the opinion of research houses since decisions such as Bathurst Regional Council v Local Government Financial Services Pty Ltd (No 5)  FCA 1200, where product research providers were found to have provided questionable advice)
• Appropriate advertising to the market
• Higher-level benchmarks for disclosure requirements
• Statutory quasi-fiduciary duties for remuneration
• Refinement of and compliance with internal and external dispute resolution measures and procedures
While this is merely a handful of examples, they each raise a similar question as to how a small, medium or large FSP can adjust to the new regime and how their clients can best fit within that framework.
FSPs need to be aware of regulatory guides that apply to their business
This author considers that two issues arise from the ASIC Report. First, does it do enough to educate the market? And secondly, are ASIC's relief measures sufficient?
In a nutshell, these answers depend on the FSP in question. The ASIC Report is technical. It requires analysis and focus. An example is the heading "Equal treatment relief to facilitate compensation arrangements consistent with RG 94" (see page 20 of the ASIC Report). Without an understanding of Regulatory Guide 94 (ASIC and APRA's joint guide on good practice for unit pricing, for instance in a property investment), an FSP may not even read this section.
However, if that FSP is a product issuer, it should be familiar with RG 94. Further, if it is not, it could read the ASIC Report and take some heart that ASIC has the power to award relief in certain circumstances where unit pricing is done in error.
FSPs should be aware that ASIC has the power to grant relief
As to whether the relief measures are appropriate, the ASIC Report is not sufficiently detailed to make a positive conclusion.
However, it is important for FSPs to know that there are in fact alternative measures available in circumstances where the FSP may technically be in breach of the Corporations Act.
FSPs should establish a learning mechanism to stay up to date with the law
It will be important in future for FSPs to continue monitoring developments in the law. Crucially, the governing body is ASIC. The ASIC Regulatory Guides are constantly changing, but also are constantly applicable to an FSP's business.
While it can be costly to reconfigure a business model to comply with legal obligations, it is important that FSPs maintain a learning system or method to adapt to the constantly changing obligations of the law.
Financial service providers can take steps to keep their knowledge current
In summary, and based on information contained in the ASIC Report, FSPs may wish to:
• Review ASIC's regulatory guides as they are published
• Revisit old regulatory guides to check amendments
• Monitor internal compliance systems and audits
• Assess the weight and information contained in research providers' findings
• Remember that there are avenues for seeking relief from ASIC in certain circumstances
• Maintain a working system of accountability and reporting both internally and externally
• Not rely on old systems and measures which may not comply with the current law