1. Regulation in the Financial Services Industry
Chapter 19
Regulation in the Financial Services Industry

2. Australian Securities & Investments Commission (ASIC)
If someone suspects a financial service provider has acted unlawfully, they can
complain to ASIC. ASIC will investigate the complaint and, if they believe a law has been breached, they can pursue the matter in a variety of ways.

3. Australian Financial Services Licences
Under the Corporations Act 2001 (Cth), all persons or businesses that offer ‘financial
services’ with some continuity must hold an Australian Financial Services Licence
(AFS Licence).

4. Financial Services
A person or business will be considered to provide ‘financial services’ if they are
involved in:
Buying or selling financial products.
Providing financial advice.
A person or business will also be considered to provide financial services if they:
Make a market for a financial product.
Operate a registered managed investment scheme.
Provide custodial or depository services.

5. Financial Products
Financial products include ‘products’ that can be used to:
Make or manage financial investments (e.g. shares, superannuation, deposit
accounts, general insurance, derivatives).
Make non-cash payments. That is, payments without the use of physical currency
(e.g. bank cheque, traveller’s cheques, debit card payments).

6. Obligations
AFS licensees are responsible for all financial services provided under their licence.
Under s912A of the Corporations Act 2001 (Cth), they have general obligations to:
Take necessary steps to ensure that financial services are provided efficiently, honestly and fairly.
Comply with the conditions on the licence.
Comply with all financial services laws.
Put in place risk management systems.
Maintain the competence to provide financial services.
Have arrangements in place to manage conflicts of interest.
Maintain resources for the financial services to be properly carried out.
Take reasonable steps to ensure authorised representatives comply with financial services laws.
Have an adequate dispute resolution system and put in place compensation arrangements (if financial services are provided to retail clients, defined below).

7. Disclosure Obligations
AFS licensees have four key disclosure requirements under the Corporations Act
2001 (Cth). They are to provide the following:
Financial Services Guide (FSG)
Statement of Advice (SOA)
Product Disclosure Statement (PDS)
Periodical Statements of Account

8. Additional Obligations on Licensees
When providing financial product advice to clients, licensees have additional
obligations under the Corporations Act 2001 (Cth).
When providing personal advice to a ‘retail client’, a financial provider must:
Make reasonable inquiries into the client’s personal financial circumstances (e.g.
assets held, any expected retirement benefits, liabilities and potential liabilities);
Have a reasonable basis for the advice that is provided;
Ensure the advice is appropriate to the client;
Warn the client if the advice is based on incomplete or inaccurate information; and
Give the client a Statement of Advice.

9. Prohibited conduct under the Corporations Act 2001 (Cth)
Market manipulation
False trading and market rigging
The spreading of information about illegal transactions.
False or misleading statements
Inducing people to deal
Dishonest conduct.
Misleading or deceptive conduct.

10. Penalties
If an AFS licensee does not comply with their obligations under the Corporations Act
2001 (Cth), they may have committed an offence which is punishable by a fine or in
some cases, criminal penalties.
Persons who have suffered loss or damage as a result of a licensee’s breach of the
provisions may commence a civil action for any loss. In addition, a court may order a
contract void that has been entered into in circumstances which involve a breach of
the law or may order the return of money to an innocent party.

11. ASIC Act 2001 Part 2 of the ASIC Act contains provisions
relating to the following issues regarding financial services:
Unfair contract terms.
Unconscionable conduct.
Consumer protection provisions such as prohibitions in respect of misleading and
deceptive conduct, false representations, pyramid schemes and bait advertising.
Conditions and warranties in relation to consumer transactions. For example,
guarantees that services will be provided with due care and skill.

12. National Responsible Lending Laws
National Consumer Credit Protection Act 2009 (Cth) (the NCCP Act) and the
attached National Credit Code (the Code).
A licensing regime to provide consumers with special protections when obtaining loans and other forms of credit.

13. Australian Credit Licences
All businesses offering ‘regulated credit activities’ must hold an Australian Credit
Licence (ACL).
This means businesses that act as:
Credit providers: lenders (e.g. banks, credit card companies); or
Credit service providers: business that arrange loans. They act as intermediaries
between the consumer and lender (e.g. brokers).

14. Responsible Lending Obligations
Licensees must provide credit to consumers responsibly. This requires an assessment of:
The suitability of a credit product to fulfil the consumer’s needs, and
The consumer’s capacity to repay the proposed credit debt.

15. Other Obligations
Licensees must inform consumers of their obligations to provide credit responsibly.
Consumers must also be informed that they have the right to receive a copy of the
final assessments.
Licensees must inform consumers about who they are, including their ACL number
and their dispute resolution membership.
They are also required to inform the consumer about any fees and charges payable upfront before the credit product is suggested or entered into and let the consumer know what commissions the lender will receive for selling the consumer that product.

16. Future of Financial Advice Reforms
In 2010, the Federal Government announced the proposed overhaul of financial
advice services.
The reforms are designed to tackle conflicts of interest that have threatened the
quality of the financial advice and the integrity of financial markets.
Initially intended to be implemented from 1 July 2012, due to the extensive
consultation and review process it is now intended the reforms will come into force
from 1 July 2013.

17. Proposed Reforms
A prospective ban on commissions and volume-based payments.
The introduction of a statutory fiduciary duty.
Increasing transparency and flexibility of payments for financial advice by introducing ‘adviser charging’.
Percentage-based fees will only be charged on ungeared products or investment amounts and only if this is agreed to with the retail investor.
Wider availability of low cost ‘simple advice.’
The strengthening of ASIC’s power.
The examination of a statutory compensation scheme to affected investors.
The requirement that accountants be qualified with an AFS licence before giving any advice relating to financial products.

18. Key Measures Best interest obligation ‘Opt-in’ for ongoing services
The best interest duty requires financial planners and advisers to act in the best interests of the client, and to give priority to the interests of the client in the event of conflict between the interests of the client and the interests of the individual providing the advice, or their employer.
‘Opt-in’ for ongoing services
The ‘opt-in’ measure requires a financial adviser or planner to send a renewal(‘opt-in’) notice every two years to new clients, as well as an annual fee disclosure statement to all clients.
Enhancements to ASIC’s powers