FSR - ASIC speaks 2004 - The road ahead (in case you missed it)

By Graeme Howatson and Randal Dennings.

Key Points:
ASIC is now concentrating on providing guidance on its financial services reform policy statements and making any necessary refinements to them. Now that the FSR transitional period has ended, ASIC has turned its attention from licensing to compliance, but the overriding message is that ASIC will work with licensees whose intention is to comply with the law.

FSR continues to be a major issue for the banking and financial services industry. A recent seminar, "ASIC Speaks 2004 - The Road Ahead", provided some valuable information on an important part of the FSR "puzzle", namely how the regulator is implementing FSR.

The seminar was presented by ASIC, in conjunction with the Securities Institute of Australia, in various locations around Australia. We attended the session held in Brisbane on 18 June 2004, at which there were three speakers from ASIC. Mark Adams, Director, Regulatory Policy provided an update on ASIC's FSR policies. Richard Farmer, Acting Director, FSR Licensing and Business Operations spoke on FSR compliance and Angus Dale-Jones, Acting Director, Regulatory Operations, Financial Services Regulation on disclosure under FSR.

In case you missed the seminar, what follows is a summary of some of the issues which we found of interest.

FSR policy update

The main point made by Mark Adams was that ASIC has issued most of its FSR policy statements and is now:

• concentrating on providing guidance on these policies; and
• making any necessary refinements to them, in consultation with consumer and industry groups.

Nevertheless, some new policy statements are yet to be issued. These policies will cover matters such as FSR compensation arrangements (which are expected to be discussed in the coming year), non-cash payment facilities and the management of conflicts of interest by financial services licensees (this policy statement is expected to be released in August 2004).

ASIC's FSR policies aim to achieve the following objectives:

• getting the "compliance balance" right;
• promoting quality and affordable advice;
• improving consumer comprehension;
• implementing the recommendations of the Managed Investments Act Review; and
• dealing with international developments.

FSR compliance

Richard Farmer said that now the FSR transitional period has ended, ASIC has turned its attention from licensing to compliance.

ASIC recognises that reacting to every complaint or breach of the law is impractical. Instead ASIC will:

• concentrate on relationships with industry bodies;
• take enforcement action in relation to "key" breaches of the law; and
• identify trends and conduct educational campaigns aimed to address industry-wide problems.

Some areas of interest for ASIC's compliance staff are:

• the payment of preferential remuneration which encourages financial advisers to recommend one financial product ahead of another;
• marketing timing and late trading; and
• general compliance with FSR licence requirements (including verification of assertions made in licence applications).

To date, the ASIC has conducted approximately 280 visits to FSR licensees to verify that they are complying with FSR requirements. These verification visits are continuing. One of the main things that ASIC looks for during these visits is evidence of a culture of compliance which goes beyond the mere production of manuals and procedures.

Of the verification visits conducted so far:

• 54 percent of visits resulted in licensees improving their compliance arrangements;
• 38 percent of visits required no further action; and
• 8 percent of visits led to further compliance surveillances.

Typical matters that required improvement were:

• no formal compliance monitoring or reporting process;
• cash flow projections not calculated or maintained;
• absence of breach registers;
• poor training records;
• no formal risk management plan or plan not covering all risks;
• inadequate professional indemnity cover and/or cover with a very high excess; and
• representatives not being monitored to ensure they operate within the scope of the licensee's AFS authorisation.

Disclosure under FSR

Angus Dale-Jones stressed that disclosure must be clear, concise and effective and that the purpose of disclosure should be to effectively communicate information to customers.

ASIC is concerned that the format of some disclosure documents (financial services guides, statements of advice and product disclosure statements) is determined more by risk management considerations than by a desire to meet the needs of consumers. For example, ASIC is concerned that a request for short, simple advice does not always generate a short, simple statement of advice.

Consideration is being given by ASIC to issues about:

• the length of disclosure documents;
• potential duplication of information in different disclosure documents;
• different delivery options for disclosure; and
• tailoring disclosure documents.

ASIC's review of a number of product disclosure statements revealed:

• that the disclosure of fees and charges is often incomplete;
• generic rather than product specific risk disclosure;
• the use of misleading past performance data and/or the failure to include a warning that past performance should not be relied upon as indicative of future performance, and
• the use of financial projections that could not be substantiated.

ASIC Policy Statement 168 provides guidance on the preparation of product disclosure statements and sets out some good disclosure principles. Good disclosure:

• is timely;
• is relevant and complete;
• promotes comparison between financial products;
• highlights important information; and
• has regard to consumer needs.

Conclusion

While the FSR transitional period has ended, it is clear that ASIC recognises that some fine tuning of the FSR regime is still necessary and that some licensees are still coming to grips with the regime's requirements.

While ASIC has said it will take enforcement action against those who do not attempt to meet their responsibilities under FSR, the overriding message to come out of the seminar is that ASIC will work with licensees whose intention is to comply with the law.

For further information, please contact Graeme Howatson and Randal Dennings.