Financial services reform - government announces proposals for refinements

By John Moutsopoulos and John Dyson.

Key Points:
Many of the proposed changes will affect disclosure documents.

The Commonwealth Treasury has just released a discussion paper on proposed refinements to the FSR regime. There are no proposals for large scale changes to the overall regime, but rather a number of refinements in specific areas. Many of the changes are aimed at shortening disclosure documents for retail clients such as Product Disclosure Statement (PDS), Financial Services Guide (FSG) and Statement of Advice (SOA). In addition, industry associations are also expected to push for additional changes when making submissions on the proposed refinements. The deadline for comments is 3 June 2005.

Length and complexity of PDSs

In order to reduce the length of PDSs, it is proposed to allow for 'short form' PDSs. This would give issuers of financial products (other than basic deposit and general insurance products) the choice between providing information in a full-length PDS, or in a short form PDS supplemented by further easily available information, eg. on a website.

The short form PDS would contain certain 'core' information which may vary depending on the type of product in question. It would also require a prominent statement notifying the consumer that further information about the product is available and the means by which it can be accessed. Providers would remain liable for all the information they are currently required to provide under the legislation, even if a client does not receive or rely on the more detailed information.

No PDSs for Basic Deposit Products (BDPs)

Subject to certain oral disclosures and disclosure of fees and charges being provided at the point of sale and on the provider's website, it is proposed that PDSs will not be required for BDPs. They will, however, continue to be included in the definition of a financial product, and people who deal in or provide advice on BDPs will remain subject to the licensing requirements.

General insurance products

The following changes are proposed in relation to general insurance:

• PDSs need only disclose core information including that required by the Insurance Contracts Act.
• a PDS would not be required for general insurance policy renewals where there is no material change in the terms and conditions of the policy, other than in relation to the amount of premium payable.
• ASIC is to provide guidance and/or relief from compliance with the authorisation requirements for agents where they are arranging for the issue of general insurance products of an Australian general insurer and where the insurer accepts responsibility for the conduct of those agents.

Tailoring FSGs to specific financial services or products

ASIC has already provided some relief, in Class Order 05/27, that is intended to allow licensees who have two or more discrete parts to their business to tailor their FSGs, that is, provide FSGs that deal with some but not all of the services which they offer.

Duplication of information in FSGs and PDSs

This proposed refinement would provide that FSGs need not include information that is already disclosed in a relevant PDS. This relief would apply in circumstances where it is likely that the potential client will subsequently receive a PDS. What is unclear is in exactly what circumstances the relief would apply, for example, whether the FSG and PDS need to be given at the same time, or within a short time of each other for the relief to apply.

Duplication of information in FSGs and SOAs

Under this proposal, disclosure in FSGs, in circumstances where providers of advice anticipate that they will provide personal advice to a retail client, would be limited to general descriptions. Specific detailed disclosure would be provided in the subsequent SOA. One issue is when can an adviser "anticipate" that they will provide advice, eg. when they are just authorised to provide advice, or only if they expect to provide advice to a particular client?

Oral disclosure by phone

Where certain financial products are recommended or issued over the telephone, currently a written PDS does not have to be given beforehand, provided certain oral disclosure is made and a PDS subsequently provided. To reduce the length of this disclosure, it is proposed that where a product is subject to a cooling-off period, a consumer can simply be informed of the cooling-off period and told that a written PDS will be provided to them.

FSGs and secondary services

Where a financial service is provided by a licensee through an intermediary licensee (see ASIC's information release 04-78 for more information about this issue), the first licensee's FSG would not have to be provided where:

• the intermediary's licence covers the same services and the intermediary accepts responsibility for the services provided; or
• where the intermediary has informed the client as to how the first licensee's FSG may be obtained.

Provision of 'general advice'

It is proposed that an exemption would be provided for general advice:

• from an unlicensed product issuer about its own products; and
• from people with no connection to a specific financial product and who do not receive remuneration or other benefits.

Other proposals

• ASIC is to clarify that mere possession of personal information about a client does not mean that advice given to that client will always be personal advice. Guidance on the use of online calculators and risk profilers will also be provided.
• Exemptions from having to provide SOAs after an initial SOA has been provided, where there is an ongoing client relationship and no significant change in the client's circumstances.
• Simplifying the content of SOAs so that information on alternative products or strategies does not have to be given.
• Amendments to the retail/wholesale client distinction.
• Clarifying how the requirement to obtain an Australian Financial Services Licence applies to person outside of Australia.
• Extending the ability to 'sub-authorise' individuals, from corporates to partnerships, trusts or sole traders.
• Providing further guidance on staff training for basic deposit products and related non-cash payment facilities.
• Extending relief for loyalty schemes and other low-value non-cash payment facilities.
• ASIC to provide guidance on the wording for General Advice Warnings to clarify that the precise words in the legislation do not have to be used.
• Harmonising the disclosure that licencees and unlicensed product issuers must give when providing general advice.

Thanks to Zina Elimelakh for her help in writing this article.