Compliance: Theory and Practice in the Financial Services Industry

1. Licensing

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IMPORTANT NOTE: These slides have been provided primarily for the use and benefit of students taking the "Compliance: Theory and Practice in the Financial Services Industry" course at Sydney University Law School. They are a summary only of the subject matter covered and are not intended to be, nor should they be relied upon as, a substitute for legal or other professional advice. In particular, it should be noted that the slides are not always verbatim quotes from the underlying source material and that material may have been abridged or paraphrased for presentational purposes. There also may have been legislative, regulatory or other developments since these slides were last updated that are not incorporated.

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Outline

   What is a Financial Product?
   What is a Financial Service?
   When is a Financial Services Licence Needed?
   Licence Conditions
   The General Obligations of a Licence Holder
   Authorised Representatives
   Liability for Conduct of Representatives
   Miscellaneous Licensing Related Matters

 


What is a Financial Product?

CA Definition of Financial Product
Three prong definition:
•    General definition - ss763A – 763E
•    List of specific inclusions - s764A
•    List of specific exclusions - s765A

These take priority in the reverse of the order mentioned above, so that if something falls within the list of specific exclusions in s765A, it cannot be a financial product even if it might otherwise fall within the list of specific inclusions in s764A or the general definition in s763A. Similarly, if something falls within the list of specific inclusions in s764A (and does not fall within the list of specific exclusions in s765A), it will always be a financial product even if it might not otherwise fall within the general definition in s763A or might otherwise be excluded from that general definition because of s763E (see below).

CA s763A(1) - General Definition of Financial Product
A financial product is a facility through which, or through the acquisition of which, a person does one or more of the following:
(a)  makes a financial investment (s763B);
(b)  manages financial risk (s763C);
(c)  makes non-cash payments (s763D).
This has effect subject to s763E.

It doesn’t matter that a facility is acquired by a particular person for some other purpose if it is of a kind through which people commonly make financial investments, manage financial risks or make non-cash payments (s763A(2)). A facility does not cease to be a financial product merely because it has been acquired by a person other than the person to whom it was originally issued and that person, in acquiring the product, was not making a financial investment or managing a financial risk (s763A(3)).

CA s762C - Definition of Facility
Facility includes:
(a)   intangible property;
(b)   an arrangement or a term of an arrangement (including a term that is implied by law or that is required by law to be included); or
(c)   a combination of intangible property and an arrangement or term of an arrangement.

Thus, a share is a "financial product" - it is intangible property, and therefore a "facility", through the acquisition of which a person makes a "financial investment".

CA s761A - Definition of Arrangement
Arrangement means, subject to s761B, a contract, agreement, understanding, scheme or other arrangement (as existing from time to time):
(a)   whether formal or informal, or partly formal and partly informal;
(b)   whether written or oral, or partly written and partly oral; and
(c)   whether or not enforceable, or intended to be enforceable, by legal proceedings and whether or not based on legal or equitable rights.

CA s761B provides that if: (a) an arrangement, when considered by itself, does not constitute a derivative, or some other kind of financial product; (b) that arrangement, and one or more other arrangements, if they had instead been a single arrangement, would have constituted a derivative or other financial product; and (c) it is reasonable to assume that the parties to the arrangements regard them as constituting a single scheme, the arrangements are to be treated as if they together constituted a single arrangement.

This is an anti-avoidance measure targeted in particular at derivatives, although it does apply to all financial products. Absent s761B, parties could structure a derivative over a commodity as a deliverable agreement under which one agrees to sell the commodity to the other at a fixed price in the future and then a further deliverable agreement under which the party receiving the goods agrees to sell a similar quantity of goods back to the supplier at market price. The two delivery obligations would effectively cancel each other out and just leave an obligation for one party to pay to the other the difference between the fixed price and the market price at the time of delivery, the economic equivalent of a derivative. As deliverable agreements over commodities, neither agreement, by itself, would fall within the definition of derivative (see s761D(3)(a), discussed in lecture 12). Taken together under s761B, however, they would.

CA s763B - Making a Financial Investment
A person (the investor) makes a financial investment if:
(a)   the investor gives money or money's worth (the contribution) to another person and:
  (i)   the other person uses the contribution to generate a financial return, or other benefit, for the investor;
  (ii)   the investor intends that the other person will use the contribution to generate a financial return, or other benefit, for the investor (even if no return or benefit is in fact generated); or
  (iii)   the other person intends that the contribution will be used to generate a financial return, or other benefit, for the investor (even if no return or benefit is in fact generated); and
(b)   the investor has no day-to-day control over the use of the contribution to generate the return or benefit.

The notes to s763B give as examples of actions that constitute making a financial investment: (a) a person paying money to a company for the issue to the person of shares in the company (the company uses the money to generate dividends for the person and the person, as a shareholder, does not have control over the day-to-day affairs of the company); and (b) a person contributing money to acquire interests in a registered managed investment scheme from the responsible entity of the scheme (the scheme uses the money to generate financial or other benefits for the person and the person, as a member of the scheme, does not have day-to-day control over the operation of the scheme).

Examples of actions that do not constitute making a financial investment are: (a) a person purchasing real property or bullion from another person (while the property or bullion may generate a return for the person, it is not a return generated by the use of the purchase money by the other person); and (b) a person giving money to a financial services licensee who is to use it to purchase shares for the person (while the purchase of the shares will be a financial investment made by the person, the mere act of giving the money to the licensee will not of itself constitute making a financial investment).

In ASIC v Money for Living (Aust) Pty Ltd (Administrators Appointed) (No 2) [2006] FCA 1285, the defendants promoted a scheme enticing home-owners, typically retirees or pensioners, to sell their homes and then lease them back for a nominal rent so as to free up and live off the equity in their homes. The marketing offered participants a "guaranteed" income and a "guaranteed" right to live in their former home for life. Unfortunately, the scheme collapsed and the companies that purchased the homes went into administration. In a short judgment, the court held that the sale and lease back transactions fell within the definition of "making a financial investment" in the Corporations Act and the Australian Securities and Investments Commission Act and therefore involved the marketing of a financial product, enlivening the court's jurisdiction to make orders in relation to misleading conduct involving financial products. In particular, it found that the sale by participants of their homes constituted the giving of money's worth to the promoter.

For a discussion of some of the issues raised by this case, see '2A. Section 763B – making a financial investment' in Lewis, A Decade On - Reforming the Financial Services Law Reforms.

CA s763C - Managing Financial Risk
A person manages financial risk if they:
(a)   manage the financial consequences to them of particular circumstances happening; or
(b)   avoid or limit the financial consequences of fluctuations in, or in the value of, receipts or costs (including prices and interest rates).

The notes to s763C give as examples of actions that constitute managing a financial risk taking out insurance and hedging a liability by acquiring a futures contract or entering into a currency swap. An example of an action that does not constitute managing a financial risk is employing a security firm, which is a way of managing the risk that thefts will happen but is not a way of managing the financial consequences if thefts do occur.

In Chameleon Mining NL v International Litigation Partners Pte Ltd [2010] NSWSC 972, the first defendant agreed to fund litigation by the plaintiff on specified terms and conditions set out in a litigation funding deed. The plaintiff purported to rescind the deed under CA s925A (see below), arguing that it constituted the issue of a financial product by a person not licensed to do so. At first instance, the NSW Supreme Court held the arrangement was not a financial product and therefore the plaintiff was not entitled to rescind it. In particular, it held that the litigation deed did not involve the making of a financial investment by the plaintiff under s763B (the plaintiff having given no money or money's worth for the deed that was to be invested by the funder in the manner prescribed by s763B(a)) and could not fairly be described as a method of managing the financial risk of the litigation within s763C. The court also held that the deed was not a derivative. The decision was reversed on appeal (International Litigation Partners Pte Ltd v Chameleon Mining NL [2011] NSWCA 50), with all 3 appeal judges holding that the litigation facility deed was a financial product under s763C because it was a facility through which financial risk was managed, namely, the financial consequences to the plaintiff of adverse costs orders and loss of litigation, and possibly also the incurring of its own costs through pursuit of the litigation. Hodgson JA (dissenting) held, however, that the deed had as its main purpose funding litigation and any management of financial risk was merely incidental to that object and it therefore was not a financial product because of the exclusion in s763E. He also considered that it amounted to a credit facility and was therefore excluded from being a financial product under s765A(1)(h). On further appeal to the High Court (International Litigation Partners Pte Ltd v Chameleon Mining NL [2012] HCA 45, the High Court unanimously held that the litigation funding facility was a credit facility and therefore excluded from being a financial product under s765A(1)(h). The High Court did not express any view on whether or not the funding agreement was a financial product under s763C.

For a discussion of some of the issues raised by this case, see '2B. Section 763C – managing financial risk' in Lewis, A Decade On - Reforming the Financial Services Law Reforms (note that this paper was written prior to the High Court decision but the concerns discussed in the paper persist, given the narrow basis for the High Court's decision and its lack of any analysis of the scope of s763C).

CA s763D - Making Non-cash Payments
A person makes non-cash payments if they make payments, or cause payments to be made, otherwise than by the physical delivery of Australian or foreign currency in the form of notes and/or coins. This does not apply, however, if:
(a)   there is only one person to whom payments can be made by means of the facility or the facility is, or is of a kind, specified in the regulations as being a facility that is not to be covered by this section because of restrictions relating to the number of people to whom payments can be made by means of the facility, or relating to the number of persons who can use the facility to make payments; or
(b)   making payments by means of a letter of credit from, a cheque drawn by and on, or a guarantee given by, a financial institution.

The notes to s763D give as examples of actions that constitute making non-cash payments the making of payments by means of: (1) a facility for direct debit of a deposit account; (2) a facility for the use of cheques; (3) a purchased payment facility such as a smart card; and (4) travellers cheques.

Pure money changing transactions are taken outside the definition of a non-cash payment facility by the exclusion of payments involving the physical delivery of Australian or foreign currency in the form of notes and/or coins. They are also specifically excluded from the definition of "financial product" by the exclusion in s765A(1)(m) for contracts to exchange one currency for another that are settled immediately.

Paragraph (a) above is intended to cover facilities that only facilitate the payment to a single person, such as store cards (to the extent that they are not credit cards and already outside the regime for financial services) and phone cards. These type of single payee non-cash payment facilities were excluded from the FSR regulatory regime as it was considered that any consumer risk to which they might give rise could be dealt with adequately under the general consumer protection provisions in Division 2 of Part 2 of the ASIC Act. There are currently no regulations expanding this exclusion to other payment facilities.

By virtue of regulations made under CA s765A(1)(y), bank drafts (7.1.07B), money orders (7.1.07F) and electronic funds transfers by ADIs and operators of payment systems (eg telegraphic transfers and international money transfers offered by banks and remittance dealers - r7.1.07G) are excluded from being financial products.

CA s765A also excludes from the operation of s763D an "approved RTGS system" within the meaning of the Payment Systems and Netting Act 1998 and a "designated payment system" for the purposes of the Payment Systems (Regulation) Act 1998 (s765A(1)(i) and (j)), a facility for the exchange and settlement of non-cash payments between providers of non-cash payment facilities (s765A(1)(k)) and financial markets, clearing and settlement facilities, payment systems operated as part of a clearing and settlement facility and derivative trade repositories (s765A(1)(l)).

See generally ASIC Regulatory Guide 185 Non-cash payment facilities.

CA s763E – Exclusion for Incidental Products
If:
(a)   something (the incidental product) that, but for this section, would be a financial product because of this subdivision (ss763A – 763D) is:
  (i)   an incidental component of a facility that also has other components; or
  (ii)   a facility that is incidental to one or more other facilities; and
(b)   it is reasonable to assume that the main purpose of:
  (i)   if (a)(i) applies - that facility, when considered as a whole; or
  (ii)   if (a)(ii) applies - the incidental product, and the other facilities, when considered as a whole;
  is not the making of a financial investment, managing financial risk or making non-cash payments,
the incidental product is not a financial product because of this subdivision (however, it may still be a financial product because of s764A).

The general definition of "financial product" in s763A has effect subject to s763E, which excludes financial products where they are only incidental to some other facility that does not have as its main purpose the making of a financial investment, managing a financial risk or making non-cash payments. For example, warranty periods or guarantees in contracts for the sale of consumer goods could be considered to be a means of managing a financial risk (ie the risk that I might have to buy a replacement product if it stops working properly) and entering into a security bond arrangement with a landlord or phone company which provides for the payment of interest could be construed to be making a financial investment. These are all carved out of the definition of "financial product" as being merely "incidental products".

Note that the carve-out for incidental products in s763E only applies to the general definition of "financial product" in ss763A – 763D. Thus to the extent that a product comes within the list of things specifically defined to be financial products in s764A, it will be a financial product regardless of whether or not it is incidental to a facility that itself is not a financial product. This means, for example, that products such as home loan insurance, consumer credit insurance and superannuation offered as part of a contract of employment would be considered to be financial products, even though they could be argued to be incidental to things that are not considered to be financial products (credit facilities and contracts of employment).

CA s764A(1) - Specific Things that are Financial Products
Subject to subdivision D (s765A), the following are financial products for the purposes of chapter 7:
(a)   securities;
(b)-(ba)   various interests in registered managed investment schemes and certain types of unregistered managed investment schemes;
(c)   derivatives;
(d)-(f)   contracts of insurance (with some exceptions);
(g)   superannuation interests;
(h)   retirement savings accounts;
(ha)  first home saver accounts (no longer available since 1/7/15);
(i)   deposit-taking facilities made available by an ADI;
(j)   debentures, stocks or bonds issued or proposed to be issued by a government;
(k)   FX contracts that are not derivatives and do not involve a simple exchange of one currency for another that is to be settled immediately;
(ka)-(kb)   Australian carbon credit units and eligible international emissions units;
(l)   margin lending facilities; and
(m)   anything declared by the regulations to be a financial product.

We look at the definition of "security" in this lecture. Later in the course we will look at interests in registered and unregistered managed investment schemes (lecture 10), derivatives (lecture 12A), insurance, superannuation and RSA products (lecture 13), first home saver accounts (lecture 11B), deposit products (lecture 11A), FX contracts (lecture 12D) and margin lending facilities (lecture 11D).

See also s765A and CR rr7.1.05 – 7.1.07I for a list of specific things that are not financial products. One of the most important exclusions is credit facilities (s765A(1)(h)). We look at this in more detail in lecture 11C.

CA s761A - Definition of Security
Security means:
(a)   a share in a body;
(b)   a debenture of a body;
(c)   a legal or equitable right or interest in a security covered by paragraph (a) or (b); or
(d)   an option to acquire, by way of issue, a security covered by paragraph (a), (b) or (c);
(e)   a right (whether existing or future and whether contingent or not) to acquire, by way of issue, the following under a rights issue:
  (i)   a security covered by paragraph (a), (b), (c) or (d);
  (ii)   an interest or right in a managed investment scheme covered by s764A(1)(b) or (ba);
(f)   a CGS depository interest;
(g)   a simple corporate bonds depository interest,
but does not include an excluded security.

In relation to (a), "share" is no longer defined in the CA and so takes its natural meaning.

In relation to (e), "rights issue" is defined in CA s9A.

In relation to (f) and (g), a "CGS depository interest" refers to a form of CHESS depository interest traded on ASX that gives the holder a beneficial interest in an underlying Australian Government bond, while a "a simple corporate bonds depository interest " refers to a form of CHESS depository interest traded on ASX that gives the holder a beneficial interest in an underlying simple corporate bond (CA s761A).

An "excluded security" is a security conferring an interest in a retirement village (CA s9).

Note that the definition of "security" above does not include an option to purchase an existing security unless it confers a legal or equitable right or interest in the underlying security. An option to purchase an existing security that does not confer such a right or interest is intended to be regulated as a derivative rather than a security. Note also that a transferable option to purchase an existing security that does confer a legal or equitable right or interest in the underlying security will by definition be a "warrant" and will be regulated as a derivative rather than a security even though technically it falls within the definition of "security" (see below and the material on warrants in lecture 12B).

CA s9 - Definition of Debenture
Debenture of a body means a chose in action that includes an undertaking by the body to repay as a debt money deposited with or lent to the body. The chose in action may (but need not) include a charge over property of the body to secure repayment of the money. However, a debenture does not include:
(a)   an undertaking to repay money deposited with or lent to the body by a person if:
  (i)   the person deposits or lends the money in the ordinary course of a business carried on by the person; and
  (ii)   the body receives the money in the ordinary course of carrying on a business that neither comprises nor forms part of a business of borrowing money and providing finance;
(b)   an undertaking by an Australian ADI to repay money deposited with it, or lent to it, in the ordinary course of its banking business;
(c)   an undertaking to pay money under:
  (i)   a cheque;
  (ii)   an order for the payment of money; or
  (iii)   a bill of exchange;
(d)   [repealed];
(e)   an undertaking by a body corporate to pay money to a related body corporate; or
(f)   an undertaking to repay money that is prescribed by the regulations.

For the purposes of this definition, if a chose in action that includes an undertaking by a body to pay money as a debt is offered as consideration for the acquisition of securities under an off-market takeover bid, or is issued under a compromise or arrangement under Part 5.1, the undertaking is taken to be an undertaking to repay as a debt money deposited with or lent to the body.

On the general meaning of "debenture", see ASIC v Maxwell [2006] NSWSC 1052, holding that certain loan agreements were debentures and that an offer to enter into the loan agreements was therefore an offer of securities for purposes of Part 6D.2 of that Act, requiring the offeree to be licensed and the offer to be the subject of a prospectus.

Para (d) above was repealed by the Corporations Legislation Amendment (Financial Services Modernisation) Act 2009. It used to exclude from the definition of "debenture" an undertaking to pay money under a promissory note that had a face value of at least $50,000. This was an historical exception that originally was introduced into the Act to promote a wholesale corporate debt market but which had grown to be exploited by those seeking to structure their way around the need to have a prospectus for debt offerings.

As promissory notes with a face value of at least $50,000 were not debentures and did not fall within any of the other financial products listed in s764A, this created a gap in the regulatory framework that ASIC widened further by publishing an FAQ expressing the view  that promissory notes also were not financial products under s763A (QFS 115: Is a promissory note a financial product?) but suggesting that, in appropriate circumstances, they might constitute an interest in a managed investment scheme.

The first part of this view (ie that promissory notes are not financial products under s763A) was, in the opinion of this writer, plainly wrong - see Lewis, "When is a Financial Product not a Financial Product?" (2004) 22 CSLJ 103.

ASIC successfully tested the second part of this view (ie that, in appropriate circumstances, promissory notes may amount to an interest in a managed investment scheme) in ASIC v Emu Brewery Mezzanine Limited [2004] WASC 241. In that case, a company raised money by issuing debt instruments styled as promissory notes with a face value of $50,000 or more under an information memorandum. In an application for rulings on various issues, the WA Supreme Court ruled that the instruments were promissory notes for the purposes of section 89 of the Bills of Exchange Act 1909 (Cth) and section 9 of the Corporations Act 2001 (Cth). They were therefore not debentures and accordingly were not subject to the prospectus requirements in Chapter 6D of the Corporations Act. It held however that the promissory notes were an interest in a managed investment scheme (and by implication were therefore subject to the product disclosure requirements in Part 7.9 of the Corporations Act unless the investors were all wholesale investors). Interestingly, while the questions for ruling initially included whether the promissory notes were a "financial product" for the purposes of the Corporations Act, the parties chose not to make submissions on this point and the court therefore did not address this contentious issue. One might wonder why ASIC chose not to have the totality of the views it expressed on the subject in QFS 115 tested and confirmed by the judiciary!

The decision that the instruments in question were promissory notes and not debentures was upheld by a majority of the Western Australian Court of Appeal in Emu Brewery Mezzanine Limited (in liq) v ASIC [2006] WASCA 105. The Court of Appeal was not called upon to address whether the company had been involved in marketing a managed investment scheme or whether promissory notes were a "financial product" for the purposes of the Corporations Act.

The reticence by ASIC to test its FAQ before the courts ultimately proved to be of no avail. In Financial Industry Complaints Service Ltd v Deakin Financial Services Pty Ltd [2006] FCA 1805, the Federal Court held that a promissory note with a face vale of more than $50,000 is a financial product for the purposes of the Corporations Act, under the general definition of that term in s763A of the Act.

The legislature has now fixed this problem by deleting para (d) from the definition of "debenture", ensuring that promissory notes of any denomination issued by companies are debentures, and therefore are regulated as "securities" under Part 7. FAQ QFS 115 has since been withdrawn as a consequence.

However, a problem still remains with bills of exchange. These too are excluded from being debentures under para (c)(iii) of the definition of that term. Again, ASIC published an FAQ (QFS 132: Is a bill of exchange a financial product?), expressing the view that bills of exchange are not financial products under s763A. That FAQ has since been withdrawn, meaning that it is unclear whether or not ASIC continues to hold this view, although the fact that it has not taken action to correct the gap in the law would suggest that it does. If it does, with respect, that view is bizarre. Why a bank would need to be licensed and to issue product disclosure statements and the like to offer a deposit product to customers but can offer them bills of exchange without any regulation whatsoever escapes any logical analysis and is totally contrary to the spirit of the FSR reforms, the intention of which was to impose a single licensing regime and consistent and comparable financial product disclosure requirements for all financial products (see para 1.04 of the Explanatory Memorandum for the Financial Services Reform Bill).

Again, in the opinion of this writer, the view expressed in FAQ QFS 32 that bills of exchange are not financial products is most likely wrong - see Lewis, "When is a Financial Product not a Financial Product?" (2004) 22 CSLJ 103.

See also ASIC v Great Northern Developments Pty Ltd [2010] NSWSC 1087, where the NSW Supreme Court held that a defendant who had issued promissory notes with a face value of more than $50,000 to 27 lenders to fund its property development business, was not operating an unregistered managed investment scheme. The court held that the subscribers to the promissory notes only received a right to repayment of principal and interest on their notes and did not receive any rights to benefits produced by a "scheme". Importantly, in that case, there had been no representation that noteholders would receive any right to receive benefits produced by the defendant’s business of raising of money and property development. Nor was there any evidence that noteholders intended pooling or use of their funds in a common enterprise.

Return to Outline


What is a Financial Service?

CA s766A – Meaning of Financial Service
A person provides a financial service if they:
•     provide financial product advice (see s766B);
•     deal in a financial product (see s766C);
•     make a market for a financial product (see s766D);
•     provide a custodial or depository service (see s766E);
•     operate a registered scheme under Chapter 5C;
•     provide a crowd‑funding service;
•     are a trustee company providing a traditional trustee company service under Chapter 5D (s766A(1A)); or
•     engage in conduct of a kind prescribed by the regulations for these purposes.

We look at the regulation of registered schemes under Chapter 5C in lecture 10. A detailed examination of the regulation of crowd funding services under Part 6D.3A and traditional trustee company services under Chapter 5D is beyond the scope of this course.

CA s766A(3) provides that a person’s conduct is not the provision of a financial service if it is done in the course of work of a kind ordinarily done by clerks or cashiers.

See generally ASIC Regulatory Guide 36 Licensing: Financial product advice and dealing and ASIC Regulatory Guide 175 Licensing: Financial product advisers – Conduct and disclosure.

CA s766B - Financial Product Advice
Financial product advice means a recommendation or a statement of opinion, or a report of either of those things, that:
(a)   is intended to influence a person or persons in making a decision in relation to a particular financial product or class of financial products, or an interest in a particular financial product or class of financial products; or
(b)   could reasonably be regarded as being intended to have such an influence (s766B(1)).
However, subject to s766B(1B), the provision or giving of an exempt document or statement is not to be taken to be a provision of financial product advice (s766B(1A)).

"Exempt document or statement" is defined in s766B(9) to include a document prepared in accordance with Chapter 7 (other than a Statement of Advice and any other document excluded by the regulations for these purposes) and any other document prescribed by the regulations to be an exempt document for these purposes. CR r7.1.08 specifies what are and are not exempt documents and statements for these purposes.

CA s766B(1B) provides that s766B(1A) does not apply for the purpose of determining whether a recommendation or statement of opinion made by an outside expert, or a report of such a recommendation or statement of opinion, that is included in an exempt document or statement is financial product advice provided by the outside expert.

There are exclusions from the definition of providing financial product advice covering advice by lawyers and tax agents in their professional capacity (s766B(5)) and limited responses to customer queries on price (ss766B(6) and (7)). Clerical-type advice would be excluded by s766A(3), mentioned in the notes to the previous slide.

In ASIC v Oxford Investments (Tasmania) Pty Ltd [2008] FCA 980, the Federal Court held that the provision of training services about a computerised system for trading SFE futures amounted to carrying on a business of providing financial product advice requiring an AFSL. The services included one-on-one and seminar-style instruction on the system, as well as the provision of market data and a licence to use a computer program to interpret the data and apply the system. The court rejected an argument that it was necessary for the defendant to give advice about a particular transaction (ie whether to buy, sell or hold a particular security) to enliven section 766B. It pointed out that the defendant was effectively expressing an opinion that, in specified circumstances arising from a particular kind of market analysis, trading in a particular way was likely to be profitable. It was also providing technical aids to assist in identifying those circumstances from day to day. The combined effect amounted to the provision of financial product advice and that such advice could reasonably regarded as intended to influence the recipient in making a decision in relation to trade in a particular class of financial products (ie futures).

CA s766C(1) and (2) - Dealing
The following conduct (whether engaged in as principal or agent) constitutes dealing in a financial product:
•     applying for or acquiring a financial product
•     issuing a financial product
•     in relation to securities or managed investment interests - underwriting the securities or interests
•     varying a financial product
•     disposing of a financial product
Arranging for a person to engage in conduct referred to above is also dealing, unless the actions concerned amount to providing financial product advice.

CA s766C(2A) provides that despite ss766A(1) and (2), providing a crowd‑funding service does not constitute dealing in a financial product.

CA s761E defines when a financial product is issued to a person and who is the issuer of a financial product. These are important concepts, since issuing a financial product may not only give rise to a need to have an AFSL, it may also be the trigger point for a requirement to give a Financial Services Guide or Product Disclosure Statement.

If a financial product is issued to a person, the person "acquires" the product from the issuer and the issuer "provides" the product to the person (s761E(1)).

Generally, a financial product is issued to a person when it is first issued, granted or otherwise made available to a person (s761E(2)). Specific rules are made, however, for certain types of products (s761E(3)). Hence, a superannuation product is taken to be issued to a person when the person becomes a member of the fund concerned. An RSA product is taken to be issued to a person when the account concerned is opened in the person's name. An FHSA product is issued to a person when the person becomes the holder (within the meaning of the First Home Saver Accounts Act 2008) of the FHSA product. A derivative is issued to a person when the person enters into the legal relationship that constitutes the derivative. And a margin lending facility is issued to a person when the person enters into the legal relationship that constitutes the margin lending facility, as the client under the facility.

CA s761(3A) provides that, for the avoidance of doubt, none of the following is taken to give rise to the issue of a financial product to a client: (a) the client making a further contribution to a superannuation fund of which the client is already a member; (aa) an employer of the client making a further contribution, for the benefit of the client, to a superannuation fund of which the client is already a member; (b) the client making a further deposit into an RSA maintained in the client’s name; (ba) the client making a further contribution (within the meaning of the First Home Saver Accounts Act 2008) into an FHSA product maintained in the client’s name; (c) the client making a further payment under a life insurance investment product; (d) the client making a further deposit into a deposit product; (e) the client engaging in conduct specified in regulations made for these purposes in relation to a financial product already held by the client.

CA s766C(3)-(7) - Exclusions from Definition of Dealing
•     A person dealing in a product on their own behalf (whether directly or through an agent or other representative) – except where the person is an issuer of financial products and the dealing is in relation to one or more of those products (s766C(3))
•     A government or local government authority, public authority or instrumentality or agent of the Crown dealing in its own securities and, in the case of a government, in its own debentures, stocks or bonds (s766C(4)(a) and (b))
•     A body corporate or unincorporated body dealing in its own securities (s766C(4)(c)) – except where the body carries on an investment business and, in the course of that business, invests funds subscribed pursuant to an offer or invitation to the public (s766C(5))
•     A sub-underwriter subscribing for shares under a sub-underwriting agreement (s766C(6))
•     Conduct prescribed by the regulations as not amounting to dealing in a financial product (s766C(7))

The so-called "self dealing" exclusions in s766C(3) and (4) are very important. They are the reason, for example, why a company does not require an AFSL simply to issue its own shares and debentures to investors (unless it is an investment company that falls within the exclusion in s766C(5)). They are also the reason why an investor who buys and sells securities on the stock market in their own name does not require an AFSL to do so.

CA s766C(3A) provides that for the purposes of s766C(3), a person (the agent) who deals in a product as an agent or representative of another person (the principal) is not taken to deal in the product on the agent's own behalf, even if that dealing, when considered as a dealing by the principal, is a dealing by the principal on the principal's own behalf.

Note that the self dealing exclusions do not apply to the responsible entity of a managed investment scheme issuing or otherwise dealing in interests in that scheme because of the carve-out for persons who are issuers of financial products, where the dealing is in relation to one or more of those products. ASIC also takes the view that they do not apply to a responsible entity of a managed investment scheme dealing in other financial products in its capacity as responsible entity, presumably on the basis that those dealings are not being done by the responsible entity on its own behalf but rather on behalf of, and for the benefit of, the members of the scheme (see, for example, para 87 of ASIC Regulatory Guide 2: AFS Licensing Kit: Part 2 - Preparing your AFS licence application and ASIC Corporations (Superannuation and Schemes: Underlying Investments) Instrument 2016/378). By extension, the same reasoning would apply to the trustee of a trust dealing in financial products in its capacity as trustee.

CA s766D(1) - Making a Market
A person makes a market for a financial product if:
(a)   either through a facility, at a place or otherwise, the person regularly states the prices at which they propose to acquire or dispose of financial products on their own behalf;
(b)   other persons have a reasonable expectation that they will be able to regularly effect transactions at the stated prices; and
(c)   the actions of the person do not, or would not if they happened through a facility or at a place, constitute operating a financial market because of the effect of s767A(2)(a).

CA s767A(2)(a) excludes from the concept of "financial market" a person making or accepting offers or invitations to acquire or dispose of financial products on the person's own behalf, or on behalf of one party to the transaction only (unless the regulations specify otherwise). This is intended to carve out OTC markets from the financial markets licensing requirements in CA Part 7.4. Instead operators of OTC markets are required to obtain a financial services licence under CA Part 7.6 authorising them to make a market.

CA s766D(2) provides that s766D(1)(a) does not apply to a person stating prices at which they propose to acquire or dispose of financial products if: (a) the person is the issuer of the products; and (b) the products are superannuation products, managed investment products or financial products referred to in s764A(1)(ba) (interests in unregistered managed investment schemes).

CA s766E(1) - Providing a Custodial or Depository Service
A person (the provider) provides a custodial or depository service to another person (the client) if, under an arrangement between the provider and the client, or between the provider and another person with whom the client has an arrangement, (whether or not there are also other parties to any such arrangement), a financial product, or a beneficial interest in a financial product, is held by the provider in trust for, or on behalf of, the client or another person nominated by the client.

CA s766E(3) excludes from this definition: (a) the operation of a clearing and settlement facility; (b) the operation of a registered scheme, or the holding of the assets of a registered scheme; (c) the operation of a regulated superannuation fund, an approved deposit fund or a pooled superannuation trust; (ca) the operation of a statutory fund by a life company; (cb) the operation of an first home saver account trust; (d) the provision of services to a related body corporate; and (e) any other conduct of a kind prescribed by the regulations for these purposes. There are further exclusions in CR r7.1.40.

Note that ASIC initially expressed the view in an FAQ (since withdrawn, QFS 7: I am a trustee of an unregistered scheme. Do I need an AFS licence for providing a custodial or depository service?) that the trustee of an unregistered managed investment scheme which holds financial products itself as trustee rather than using a separate licensed custodian is likely to require an AFSL that authorises it to provide a custodial or depository service. Since then, ASIC has issued class order relief  exempting trustees of wholesale equity schemes from having to hold an AFSL to provide custodial or depository services and dealing services, provided the manager of the scheme holds an AFSL (see Class Order [CO 07/74] Wholesale Equity Schemes: Licensing relief for trustees). See also ASIC Regulatory Guide 192 Licensing: wholesale equity venture capital schemes which explains this relief.

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When is a Financial Services Licence Needed?

CA s911A – Requirement to Hold a Licence
A person who carries on a financial services business in this jurisdiction must hold an Australian financial services licence covering the provision of the financial services unless:
•     the person provides the services as a representative of an Australian financial services licensee or a person who is exempt from the licensing requirements (s911A(2)(a));
•     the person is a body regulated by APRA, the service is one in relation to which APRA has regulatory or supervisory responsibilities and is provided only to wholesale clients (s911A(2)(g));
•     the person is regulated by an overseas regulatory authority, the provision of the service by the person is covered by an exemption specified by ASIC in writing for this purpose published in the Gazette and the service is provided only to wholesale clients (s911A(2)(h));
•     the person is an offshore service provider who arranges for an AFSL holder to deal in a financial product on behalf of an offshore client (r7.6.01(f));
•     the person is an offshore service provider through whom the holder of an appropriate AFSL arranges a dealing in a financial product on behalf of an Australian client (r7.6.01(n));
•     the person is an offshore provider providing services outside Australia to an Australian citizen or resident, where the provider hasn't engaged in conduct that is intended to, or likely to, induce persons in Australia to use the service (s911A(2A)/r7.6.02AG);
•     the person is an offshore provider providing services to a person in Australia in relation to a product issued by the provider (a) following an application by, or inquiry from, the client or (b) acquired by the client when they were outside Australia, where the provider did not actively solicit persons in Australia in relation to that product (s911A(2D)/r7.6.02AG);
•     the person is an offshore provider providing services outside Australia to an AFSL holder, or to a person who is exempt from holding an AFSL under s911A(2)(h), acting on their own behalf (s911A(2C)/r7.6.02AG);
•     the person is an offshore provider and is dealing in, advising on, or making a market in, derivatives, FX contracts, carbon units, Australian carbon credit units or eligible international emissions units for a professional investor (s911A(2E)/r7.6.02AG);
•     the person is providing sub-custodial services to a master custodian who holds the requisite AFSL (r7.6.01(k)); or
•     one of the other exemptions in s911A(2) or in r7.6.01 applies.

The exemption in s911A(2D) also covers services provided in relation to a supplementary or substituted product issued by the offshore provider in relation to the original product referred to in that exemption. The requirement in that exemption that the service provider not actively solicit persons in Australia does not preclude them from contacting the client in relation to the financial products in question.

Note that the exemption in s911A(2)(h) requires a written exemption from ASIC before it applies. This may be granted on a one-off basis or to a category of offshore service providers under a class order. For an exposition of how ASIC exercises its powers in this regard, see ASIC Regulatory Guide 176 Licensing: Discretionary powers - wholesale foreign financial services providers. There are existing class orders that provide transitional relief until 22 September 2018 for financial services providers regulated by the UK FCA, US SEC, US Federal Reserve and OCC, US CFTC, Singapore MAS, Hong Kong SFC or German BaFin (see ASIC Corporations (Repeal and Transitional) Instrument 2016/396).

Two of the requirements that ASIC typically imposes to qualify for this relief is that the foreign licensee disclose to clients that they are exempt from holding an AFSL and are regulated by the relevant overseas regulatory authority, and that they notify ASIC of material investigations and enforcement matters within a prescribed timeframe. Failure to comply with these conditions results in an automatic disqualification from the relief granted. For an example of ASIC taking action against a foreign licensee (Barclays) for breaching these requirements, see ASIC Media Release 17-077MR.

The list of exemptions from the requirement to hold an AFSL on the slide above is by no means an exhaustive list of exemptions (there are many others) but these are the main ones for our purposes. Note that none of the exemptions applies if the service provided is the operation of a registered managed investment scheme or a traditional trustee company service (s911A(4)). In all cases, the operator of a registered managed investment scheme or provider of traditional trustee company service must have an AFSL.

The various exemptions mentioned above for offshore providers are especially important for multi-national financial services groups, given the breadth and effect of s911D (see below). It is not uncommon for these groups to have a small number of flagship account carriers with substantial balance sheets. Typically, those carriers are headquartered and licensed in places like the US, UK and Japan. They will usually also have subsidiaries with much smaller balance sheets licensed in other jurisdictions where the group has a place of business. Generally they will want their client accounts, particularly large wholesale accounts, to be carried in the flagship entities rather than the local subsidiaries, as this is usually easier from a systems/infrastructure standpoint and has regulatory capital and netting advantages. Most larger customers, particularly wholesale customers, would usually prefer this as well from a credit and netting standpoint. So, even though a local Australian customer will deal with local sales staff as representatives of the local licensed entity, when it comes to write the business, it often gets "introduced to" and written in the name of an offshore flagship. This begs the question whether the offshore flagship is carrying on a financial services business in Australia that requires a licence.

Before the FSR reforms, these groups often either ignored the licensing issue (based on an assumption/hope that the local regulators would be unlikely to take action because of the involvement of a locally licensed entity in the transaction) or they set up some pretty dubious structures based around CA s21(3)(e) – which we will look at shortly – to get around the issue. The exemption in r7.6.01(n) now provides a sounder basis for these types of arrangements, provided the group is careful to ensure that Australian customers are introduced to the flagship entity by a locally licensed entity.

Of course, r7.6.01(n) only addresses the licensing issue. Booking business in the name of an offshore entity can raise serious tax issues. If employees here are authorised to enter into contracts on behalf of an offshore entity then that may constitute a permanent establishment here for tax purposes. That in turn may give rise to an obligation for the offshore entity to file a tax return here and to pay tax on any profits that are attributable to that permanent establishment. So if you see that sort of activity happening in a financial services organisation, get the tax experts to look at it.

For ASIC's view on when a foreign financial services provider needs an AFSL to do business in Australia or with Australian customers, see ASIC Regulatory Guide RG121 Doing financial services business in Australia.

The process for obtaining a financial services licence is outlined in ASIC Regulatory Guides RG1 AFS Licensing Kit: Part 1 — Applying for and varying an AFS licence, RG2 AFS Licensing Kit: Part 2 — Preparing your AFS licence application and RG3 AFS Licensing Kit: Part 3 — Preparing your additional proofs.

See also ASIC Regulatory Guides RG104 Licensing: Meeting the general obligations, RG105 Licensing: Organisational competence and RG166 Licensing: Financial requirements for the conditions that have to be satisfied in order to obtain a financial services licence.

CA s911D - When a Financial Services Business is Taken to be Carried on in This Jurisdiction
A financial services business is taken to be carried on in this jurisdiction by a person if, in the course of the person carrying on the business, the person engages in conduct that is:
(a)   intended to induce people in this jurisdiction to use the financial services the person provides; or
(b)   is likely to have that effect;
whether or not the conduct is intended, or likely, to have that effect in other places as well.

Thus, persons based offshore who use the telephone, fax, email or internet to contact clients in Australia may still be considered to be carrying on business here even though they don't have a physical presence in the jurisdiction.

ASIC Corporations (Foreign Financial Services Providers – Limited Connection) Instrument 2017/182 exempts providers (on a transitional basis until 27 September 2018) from the requirement to hold an AFSL where the person provides regulated financial services to wholesale clients only and where the only reason the person is taken to be carrying on a financial services business in Australia is as a result of CA s911D. It is generally relied on by those offshore providers who do not have any presence or staff in Australia and who cannot avail themselves of the class order relief for foreign financial service providers in s911A(2)(h) mentioned above.

Meaning of Financial Services Business
•     Financial services business means a business of providing financial services (s761A).
•     At common law, business Þ system, repetition and continuity (Edgelow v MacElwee [1918] 1KB 205).
•     A one-off or isolated financial service is therefore unlikely to be caught (Hungier v Grace (1972) 127 CLR 210 and ASIC v Cycclone Magnetic Engines Inc & Ors [2009] QSC 58).
•     But it does not take much system, repetition or continuity to constitute a business (ASIC v McNamara (2002) 42 ACSR 488, ASIC v Young [2003] QSC 29 and Dunlop Pneumatic Tyre Co v Act Für Motor und Motorfahrzeugbau vorm Cudell & Co [1902] 1 KB 342).
•     In working out whether someone carries on a financial services business, Part 1.2 Division 3 needs to be taken into account. However, s21(3)(e) does not apply for the purposes of Chapter 7 (s761C).

In Edgelow v MacElwee, the question in issue was whether the plaintiff solicitor was carrying on the business of money-lending without the required registration. McCardie J observed (at p 206): "There must be more than occasional and disconnected loans. There must be a business of money-lending, and the word 'business' imports the notion of system, repetition and continuity ... The line of demarcation cannot be defined with closeness or indicated by any specific formula. Each case must depend on its own peculiar feature. It is ever a question of degree."

In Hungier v Grace, H, an electrical contractor, was asked by G, a friend and timber merchant, to lend him money to purchase timber for his business. It was agreed that H and G would share equally the profit derived by G on each transaction funded. H made 32 loans aggregating $287,000 over a 6 year period. As agreed, the interest varied according to the profitability of the transaction for which the money was borrowed and ranged between 17% and 82%. G ultimately ran into financial difficulties and entered into a scheme of arrangement with his creditors. H’s proof of debt for outstanding loans plus interest was rejected by the trustee administering the scheme, asserting that H was carrying on business as an unregistered money-lender and therefore, by law, could not recover the money lent or any interest thereon. The High Court held that H was not carrying on a business of money-lending and therefore did not need to be registered. The fact that H and G were friends, the only loans H made were to G, and G requested each loan and set the period and amount of the repayments, were held to all point to H not carrying on a money-lending business.

In ASIC v Cycclone Magnetic Engines Inc & Ors, the Supreme Court of Queensland held that a company raising seed capital for the conduct of its own business by offering and issuing shares to over 70 investors was not carrying on a financial services business. The court found that the act of offering shares to raise capital for a business was not itself carrying on a business and that, in any event, the conduct in question had taken place over a relatively short period and had not continued and was therefore of a "one-off" nature.

In ASIC v McNamara, a limited partnership was formed to provide finance to a joint venture entity. Two individuals, acting on behalf of the general partner, sought and received subscriptions from 55 mostly retail investors for units in the limited partnership. The conduct in question spanned the transition date for the FSR reforms. The limited partnership was not registered as a managed investment scheme and neither the general partner nor the individuals acting on its behalf held a dealers licence under the former law or an AFSL under the current law. The Federal Court held that the offering of units to 55 investors was sufficiently "systematic, repetitious and continuous" that the general partner and the individuals concerned were all carrying on a securities business under the former law and a financial services business under the current law and had contravened the Corporations Act by not having the requisite licence.

In ASIC v Young, it was held that the activities of real estate agents in raising finance from and selling property to participants in a so-called "Investors Club" constituted the unlawful operation of a managed investment scheme. The court found that the promotion of 7 property developments through the club was sufficient to mean that the schemes were promoted by a person in the business of promoting managed investment schemes and therefore the schemes required registration even though they each had less than 20 members.

In Dunlop Pneumatic Tyre Co v Act Für Motor und Motorfahrzeugbau vorm Cudell & Co, it was held that a foreign car manufacturer which had hired a stand at the Crystal Palace to exhibit its goods at a cycle show and manned it with a single salesman for 9 days was carrying on business in the jurisdiction for the duration of the show and that the service of a writ on that salesman for breach of patent by the foreign company was therefore valid. One could argue that this case involved residence and service of process issues, where a court might naturally be expected to take a wider reading of when someone was carrying on business in the jurisdiction than for other purposes. However, in Kelty v Athertons (SA) Pty Ltd (1982) 6 ACLR 477, Sangster J (at p480) expressed the view that "it may well be that any foreign company carrying on business sufficient to make it a resident for jurisdictional purposes would come within the definition of a foreign company carrying on business in this State" for the purposes of the Corporations Act foreign company registration requirements.

CA Part 1.2 Div3 - Meaning of Carry on Business
•     Doesn’t matter that the business is not for profit (s18).
•     Doesn’t matter that the business is carried on as part of, or in conjunction with, another business (s19).
•     Doesn’t matter whether the business is carried on alone or with others (s20).
•     If you have a place of business here, then you carry on business here (s21(1)).
•     A body corporate carries on business here if it:
  •     establishes or uses a share transfer office or share registration office here; or
  •     administers, manages, or otherwise deals with, property situated here as an agent, legal personal representative or trustee, whether by employees or agents or otherwise (s21(2)).

 

CA s21(3) - Exclusions From Carrying On Business
Despite s21(2), a body corporate does not carry on business here merely because it:
(a)   is or becomes a party to a proceeding or effects settlement of a proceeding or of a claim or dispute here;
(b)   holds meetings of its directors or shareholders or carries on other activities concerning its internal affairs here;
(c)   maintains a bank account here;
(d)   effects a sale through an independent contractor here;
(e)   solicits or procures an order that becomes a binding contract only if the order is accepted outside Australia;
(f)   creates evidence of a debt, or creates a security interest in property ...;
(g)   secures or collects any of its debts or enforces its rights in regard to any securities relating to such debts here;
(h)   conducts an isolated transaction that is completed within a period of 31 days, not being one of a number of similar transactions repeated from time to time here; or
(j)   invests any of its funds or holds any property here.

CA s21(3)(e) formed the basis of a number of schemes used by offshore financial institutions in the past to avoid having to get a licence here. CA s761C now eliminates these avoidance techniques by disregarding 21(3)(e) for the purposes of Chapter 7.

Consequences of Failure to Hold Licence When Required
•     Criminal offence – 200 penalty units and/or imprisonment for 2 years for individuals, 1,000 penalty units for bodies corporate (s1311 and schedule 3; s1312).
•     Client (if not themselves a licensee) may give a notice rescinding any agreement constituting or relating to the provision of a financial service by a non-licensee within a reasonable period of becoming aware that the service provider is not a licensee (s925A).
•     Service provider may not directly or indirectly enforce or rely on an agreement that is able to be, or is, rescinded (s925E).
•     Service provider not entitled to recover by any means (including set-off or quantum meruit) any brokerage, commission or other fee otherwise payable under an agreement that is able to be rescinded or that has been the subject of a notice of rescission (s925F).
•     Client entitled to recover any brokerage, commission or other fee paid under an agreement that is able to be rescinded or that has been the subject of a notice of rescission (s925H).

References above to an agreement that is able to be rescinded mean an agreement in relation to which a client is entitled to give a notice of rescission under s925A.

The last 2 bullet points apply even where the notice of rescission is not actually effective to rescind the agreement under s925B (which prevents a notice of rescission taking effect if it would prejudice a right, or an estate in property, acquired by a person (other than the non‑licensee) in good faith, for valuable consideration and without notice of the facts entitling the client to give the notice).

Note that this slide is an over-simplification of the law. There are various conditions that may disqualify the client, in whole or in part, from exercising their right of rescission. However, we do not need to go into that level of detail. It is sufficient for the purposes of this course that you know that failure to hold a licence when one is required carries serious penalties.

Illustrating the point, in 2014, Interactive Brokers LLC, a US-based online brokerage firm, was forced to refund approximately $1.5 million in fees and commission payments to its retail margin lending customers, following an ASIC investigation that found that during the period July 2010 to August 2013, it did not hold an AFSL authorising the provision of margin loans. Approximately 3000 retail customers took out margin loans with Interactive Brokers during this period. See ASIC Media Release 14-336MR.

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Licence Conditions

CA s914A(1) - Conditions on a Licence
(1)   Subject to this section, ASIC may, at any time, by giving written notice to a financial services licensee:
  (a)   impose conditions, or additional conditions, on the licence; and
  (b)   vary or revoke conditions imposed on the licence. ...
(6)   ASIC must ensure that the licence is subject to a condition that specifies the particular financial services or class of financial services that the licensee is authorised to provide.
(7)   The financial services or class of financial services may be specified by reference to particular financial products, or classes of financial products.
(8)   The licence is subject to such other conditions as are prescribed by the regulations for these purposes. However, ASIC cannot vary or revoke those conditions.

CA s914A(2) provides that ASIC may impose licence conditions on its own initiative or at the request of the licensee. However, CA s914A(3) provides that ASIC may only do this after it has granted a licence if it gives the licensee at opportunity to be heard on the matter.

If the licensee is APRA regulated and not an ADI, ASIC must consult with APRA if any condition is going to prevent APRA from being able to carry out its regulatory or supervisory activities and must notify APRA of any conditions imposed (CA s914A(4)). If the licensee is an ADI, then the power that ASIC would otherwise have to impose a condition preventing the ADI from carrying on all or any part of its banking business is instead exercisable by the Minister (CA s914A(5)).

CR r7.6.04 – Standard Licence Conditions
An Australian financial services licence is subject to the following conditions:
(a)   if the financial services licensee is not a body regulated by APRA (excluding an RSE licensee that is also the responsible entity of a registered scheme - CR r7.6.04(1A)) - a condition that, if any event occurs that may make a material adverse change to the financial position of the financial services licensee by comparison with its financial position:
  (i)   at the time of the application for the Australian financial services licence; or
  (ii)   as described in documents lodged with ASIC after the application for the Australian financial services licence;
  the financial services licensee must lodge with ASIC in the prescribed form a notice setting out particulars of the event as soon as practicable, and in any case not later than 3 business days, after the financial services licensee becomes aware of the event;
(b)   a condition that, if:
  (i)   there is a change in a matter particulars of which are entered in a register of financial services licensees; and
  (ii)   the change is not a direct consequence of an act by ASIC;
  the financial services licensee must lodge with ASIC in the prescribed form particulars of the change within 10 business days after the change;
(c)   a condition that, if:
  (i)   there is a change in a matter particulars of which are entered in a register of authorised representatives of financial services licensees;
  (ii)   the change is not required to be reported in accordance with CA s916F; and
  (iii)   the change is not a direct consequence of an act by ASIC;
  the financial services licensee must ensure that particulars of the change are lodged with ASIC in the prescribed form within 10 business days after the change;
(ca)  a condition that the financial services licensee must ensure that each representative of the financial services licensee that may give an authorisation to another representative is aware of the requirements in CA ss916F(1) and (3);
(d)   a condition that the financial services licensee must maintain a record of the training (relevant to the provision of financial services) that each of its representatives has undertaken, including:
  (i)   training undertaken after the representative became a representative of the licensee; and
  (ii)   any training undertaken before the representative became a representative of the licensee to the extent that the financial services licensee is able to obtain the information by reasonable inquiry;
(e)   a condition that the financial services licensee must ensure that, before:
  (i)   the financial services licensee authorises a person to provide a financial service on its behalf as mentioned in CA s916A; or
  (ii)   a body corporate that is an authorised representative of the financial services licensee authorises an individual to provide a financial service on behalf of the financial services licensee as mentioned in CA s916B;
  reasonable inquiries are made to establish:
  (iii)   the person's identity; and
  (iv)   whether the person has already been allocated a number by ASIC as an authorised representative;
(f)   a condition that the financial services licensee must ensure that, if:
  (i)   ASIC has allocated a number to an authorised representative; and
  (ii)   the financial services licensee, or a body corporate that has authorised an individual to provide a financial service on behalf of the financial services licensee as mentioned in CA s916B, lodges a document with ASIC that refers to the authorised representative;
  the document refers to the number;
(g)   a condition that the financial services licensee must provide a copy of an authorisation of any of its authorised representatives:
  (i)   on request by any person;
  (ii)   free of charge; and
  (iii)   as soon as practicable after receiving the request and, in any event, within 10 business days after the day on which it received the request;
(h)   a condition that the financial services licensee must take reasonable steps to ensure that each of its authorised representatives supplies a copy of its authorisation by the financial services licensee:
  (i)   on request by any person;
  (ii)   free of charge; and
  (iii)   as soon as practicable after receiving the request and, in any event, within 10 business days after the day on which it received the request;
(i)   a condition that, if a financial services licensee becomes aware of any change in control of the financial services licensee, the financial services licensee must lodge with ASIC, in the prescribed form, particulars of the change not later than 10 business days after the change;
(j)   a condition that, on the request of any person, the financial services licensee must make available a copy of its financial services licence within a reasonable time for inspection by that person.

"Control" and "change in control" are defined for the purposes of (i) above in CR r7.6.04(2).

There is a further standard licence condition in CR r7.6.04(k) applicable to accountants holding a limited licence but that is not relevant for  our purposes.

ASIC Pro Forma 209 – Standard AFS Licence Condition re Authorisations
1. This licence authorises the licensee to carry on a financial services business to:
(a)   provide financial product advice for the following classes of financial products ...
(b)   deal in a financial product by:
  (i)   issuing, applying for, acquiring, varying or disposing of a financial product in respect of the following classes of financial products ...
  (ii)   applying for, acquiring, varying or disposing of a financial product on behalf of another person in respect of the following classes of financial products ...
  (iii)   underwriting ...
  (iv)   arranging for another person to issue, apply for, acquire, vary or dispose of a financial product in respect of the following classes of financial products ...
  (v)   arranging for another person to apply for, acquire, vary or dispose of a financial product in respect of the following classes of financial products  ...
  (vi)   arranging for another person to underwrite ...
(c)   make a market for the following financial products ...
(d)   operate the following kinds of registered managed investment schemes (including the holding of any incidental property) in its capacity as responsible entity of ...
(e)   provide the following custodial or depository services ...
(f)   provide traditional [trustee company] services;
to retail and/or wholesale clients.

ASIC Pro Forma 209 sets out the pro forma conditions, including financial conditions, typically imposed by ASIC when it grants a financial services licence.

In the case of (a), (b) and (c) above, the relevant financial products are specifically listed in the licence. In the case of (d), the name of a specific scheme or a kind of scheme is specified in the licence. In the case of (e), the specific services authorised are listed in the licence.

ASIC’s practice of only granting an AFSL that authorises the holder to provide particular financial services in relation to particular financial products is sensible - ASIC needs to be satisfied that the holder has the organisational competence, expertise and systems to advise on or deal in relevant products - but it is also very limiting. Take for example, the responsible entity (RE) of a registered managed investment scheme. ASIC will generally give the RE a licence to operate the scheme, to advise on and deal in interests in the scheme and to deal in securities for the purposes of the scheme. But an RE that acquires or disposes of derivatives (eg for hedging) may also need an authority to deal in derivatives. An RE that enters into FX contracts may need an authority to deal in FX. An RE that insures scheme property may need an authority to deal in insurance products. An RE that deposits surplus cash into a bank account may need an authority to deal in basic deposit products. And so on. This is why when you are applying for an AFSL, you need to think very carefully about the types of financial products and services the licensee will be providing and make sure that your application seeks all of the authorities that the licensee will need.

ASIC Pro Forma 209 – Standard AFS Licence Condition re Compliance
4. The licensee must establish and maintain compliance measures that ensure, as far as is reasonably practicable, that the licensee complies with the provisions of the financial services laws.

Condition 4 is imposed on all licensees.

ASIC Pro Forma 209 – Standard AFS Licence Conditions re Training
6. The licensee must for any natural person who provides financial product advice to retail clients on behalf of the licensee (including the licensee if he or she is a natural person):
(a)   identify the tasks and functions that person performs on behalf of the licensee;
(b)   determine the appropriate knowledge and skills requirements required to competently perform those tasks and functions; and
(c)   implement procedures for continuing training.
7. The licensee must ensure that any natural person who provides financial product advice to retail clients on behalf of the licensee (including the licensee if he or she is a natural person):
(a)   has completed training courses at an appropriate level that are or have been approved by ASIC in writing that are relevant to those functions and tasks;
(b)   has been individually assessed as competent by an assessor that is or has been approved by ASIC in writing; or
(c)   in respect of financial product advice on basic deposit products and facilities for making non-cash payment products that are related to a basic deposit product or First Home Saver Accounts issued by an ADI ... has completed training courses that are or have been assessed by the licensee as meeting the appropriate level that are relevant to those functions and tasks.

Conditions 6 and 7 are imposed on all licensees authorised to provide financial product advice to retail clients. There are exceptions to condition 7 set out in conditions 8 and 9.

See generally ASIC Regulatory Guide 146 Licensing: Training of financial product advisers.

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The General Obligations of a Licence Holder

CA s912A(1) - General Obligations
A financial services licensee must:
(a)   do all things necessary to ensure that the financial services covered by the licence are provided efficiently, honestly and fairly;
(aa)   have in place adequate arrangements for the management of conflicts of interest that may arise wholly, or partially, in relation to activities undertaken by the licensee or a representative of the licensee in the provision of financial services as part of the financial services business of the licensee or the representative;
(b)   comply with the conditions on the licence;
(c)   comply with financial services laws;
(ca)   take reasonable steps to ensure that its representatives comply with financial services laws;
(d)   subject to s912A(4) (bodies regulated by APRA), have available adequate resources (including financial, technological and human resources) to provide the financial services covered by the licence and to carry out supervisory arrangements;
(e)   maintain the competence to provide those financial services;
(f)   ensure that its representatives are adequately trained, and are competent, to provide those financial services;
(g)   if those financial services are provided to persons as retail clients - have a dispute resolution system complying with s912A(2);
(h)   subject to s912A(5) (bodies regulated by APRA), have adequate risk management systems; and
(j)   comply with any other obligations that are prescribed by the regulations for these purposes.

CA s912A(4) provides that s912A(1)(d) does not apply to a body regulated by APRA, unless the body is an RSE licensee, and does not apply to an RSE licensee, unless the RSE licensee is also the responsible entity of a registered scheme.

CA s912A(5) provides that s912A(1)(h) does not apply to a body regulated by APRA, unless the body is an RSE licensee that is also the responsible entity of a registered scheme, and does not apply to an RSE licensee that is also the responsible entity of a registered scheme to the extent that the risk relates solely to the operation of a regulated superannuation fund by the RSE licensee.

In relation to the phrase "efficiently, honestly and fairly" in CAs912A(1)(a), Young J observed in Story v National Companies and Securities Commission (1988) 13 NSWLR 661 at 672:

    

"In one sense it is impossible to carry out all three tasks concurrently. To illustrate, a police officer may very well be most efficient in control of crime if he just shot every suspected criminal on sight. It would save a lot of time in arresting, preparing for trial, trying and convicting the offender. However, that would hardly be fair. Likewise a judge could get through his list most efficiently by finding for the plaintiff or the defendant as a matter of course, or declining to listen to counsel, but again that would hardly be the most fair way to proceed. Considerations of this nature incline my mind to think that the group of words "efficiently, honestly and fairly" must be read as a compendious indication meaning a person who goes about their duties efficiently having regard to the dictates of honesty and fairness, honestly having regard to the dictates of efficiency and fairness, and fairly having regard to the dictates of efficiency and honesty ...

    

So far as "efficient" is concerned, someone is an efficient person or performs his duties efficiently if he is adequate in performance, produces the desired effect, is capable, competent and adequate ..."

Young J further explained the test of efficiency (at 679), as: "does the relevant conduct show that the performance by the plaintiff of his functions falls short of the reasonable standard of performance by a [licensee] that the public is entitled to expect?"

In ASIC v Camelot Derivatives Pty Ltd [2012] FCA 414, the Federal Court held that the strategy adopted by a licensee and its managing director of inducing clients to trade in options in an endeavour to secure excessive brokerage for the licensee as a result of those trades was neither honest, in a commercial sense, nor fair and therefore breached s912A(1)(a).

We look at the requirement in (aa) above to manage conflicts of interest in further detail in lecture 9.

Linking the requirements in (a) and (c), it was observed by Forgie DP in Re Kippe and ASIC (1997) 16 ACLC 190, at paragraph 209, that: "A person cannot be said to operate efficiently if he or she has no knowledge, or only a very limited knowledge, of the laws which must be followed and which may circumscribe his or her actions."

In relation to (c) and (ca) above, "financial services law" is defined in CA s761A to mean (a) CA Chapters 5C, 5D, 6, 6A, 6B, 6C, 6D or 7; (b) a provision of CA Chapter 9 as it applies in relation to those other Chapters; (c) Division 2 of Part 2 of the ASIC Act; (d) any other Commonwealth, State or Territory legislation that covers conduct relating to the provision of financial services (whether or not it also covers other conduct), but only in so far as it covers conduct relating to the provision of financial services; and (e) any rule of common law or equity that covers conduct relating to the provision of traditional trustee company services (whether or not it also covers other conduct), but only in so far as it covers conduct relating to the provision of such services. Paragraphs (d) and (e) of this definition potentially have a very broad reach and their scope is somewhat unclear.

CR r7.6.02A provides some guidance as to scope of paragraph (d) of the definition of "financial services law", at least as far as Commonwealth laws are concerned. That regulation specifies which breaches of legislation have to be notified to ASIC under s912D (see below). It specifies the Australian National Registry of Emissions Units Act 2011, Banking Act 1959, Carbon Credits (Carbon Farming Initiative) Act 2011, Clean Energy Act 2011, Financial Sector (Collection of Data) Act 2001, Financial Sector (Shareholdings) Act 1998, Financial Sector (Transfers of Business) Act 1999, Insurance Acquisitions and Takeovers Act 1991, Insurance Act 1973, Insurance Contracts Act 1984, Life Insurance Act 1995, Retirement Savings Accounts Act 1997, Superannuation Industry (Supervision) Act 1993 and Superannuation (Resolution of Complaints) Act 1993 - implying that these Acts all fall within the scope of paragraph (d) of the definition of "financial services law". While they are not mentioned in r7.6.02A, I think it is reasonably clear that the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 and Financial Transaction Reports Act 1988 are both laws that cover conduct relating to the provision of financial services and therefore fall within paragraph (d) of the definition of "financial services laws".

Note that the expression "representative" in (ca) and (f) above captures employees, directors and "authorised representatives" (see s910A below). In ASIC Market Supervision Update 34, ASIC reminded licensees of the need to ensure they have robust recruitment processes in place when appointing authorised representatives, particularly where they have worked for a business in relation to which ASIC has previously taken enforcement action. This includes ensuring that the representatives are effectively screened and their backgrounds checked, verifying that they are competent and ensuring that they are adequately trained and supervised.

 

CA s912C – ASIC Directions to Provide a Statement
ASIC may, by giving written notice to a financial services licensee, direct the licensee to give to ASIC a written statement containing the specified information about:
(a)   the financial services provided by the licensee or its representatives; or
(b)   the financial services business carried on by the licensee.
ASIC may also, by giving written notice to the licensee, direct the licensee to obtain an audit report, prepared by a suitably qualified person specified in the notice, on such a statement before the statement is given to ASIC.

Failure to comply with such a notice is an offence punishable by a fine of 25 penalty units and/or imprisonment for 6 months for individuals and a fine of 125 penalty units for bodies corporate.

CA s912E - Surveillance Checks by ASIC
A financial services licensee and its representatives must give such assistance to ASIC, or a person authorised by ASIC, as ASIC or the authorised person reasonably requests in relation to whether the licensee and its representatives are complying with the financial services laws, and in relation to the performance of ASIC’s other functions. Such assistance may include showing ASIC the licensee’s books or giving ASIC other information.

Failure to comply is an offence punishable by a fine of 25 penalty units and/or imprisonment for 6 months for individuals and a fine of 125 penalty units for bodies corporate.

CA s912D(1) - Obligation to Notify ASIC of Significant Breaches
If:
(a)   a financial services licensee breaches, or is likely to breach:
  (i)   any of the obligations under s912A or 912B, other than the obligation under s912A(1)(c);
  (ii)   the obligation under s912A(1)(c), so far as it relates to provisions of this Act or the ASIC Act referred to in paragraphs (a), (b) and (c) of the definition of financial services law in s761A;
  (iii)   in relation to financial services, other than traditional trustee company services provided by a licensed trustee company - the obligation under s912A(1)(c), so far as it relates to Commonwealth legislation that is covered by paragraph (d) of that definition and that is specified in regulations made for these purposes; or
  (iv)   in relation to traditional trustee company services provided by a licensed trustee company - the obligation under s912A(1)(c), so far as it relates to Commonwealth, State or Territory legislation, or a rule of common law or equity, that is covered by paragraph (d) or (e) of that definition; and
(b)   the breach, or likely breach, is significant, having regard to the following:
  (i)   the number or frequency of similar previous breaches;
  (ii)   the impact of the breach or likely breach on the licensee's ability to provide the financial services covered by the licence;
  (iii)   the extent to which the breach or likely breach indicates that the licensee's arrangements to ensure compliance with those obligations is inadequate;
  (iv)   the actual or potential financial loss to clients of the licensee, or the licensee itself, arising from the breach or likely breach;
  (v)   any other matters prescribed by regulations made for these purposes;
the licensee must give a written report on the matter to ASIC as soon as practicable, and in any case within 10 business days, after becoming aware of the breach or likely breach.

CA s912D(1A) provides that for these purposes, a financial services licensee is likely to breach an obligation if, and only if, the person is no longer able to comply with the obligation.

The provisions of the CA and ASICA referred to in paragraphs (a), (b) and (c) of the definition of "financial services law" in s761, as mentioned in s912D(1)(a)(ii), are: (a) CA chapters 5C, 5D, 6, 6A, 6B, 6C, 6D or 7; (b) a provision of CA Chapter 9 as it applies in relation to those other Chapters; and (c) Division 2 of Part 2 of the ASIC Act.

The relevant pieces of Commonwealth legislation referred to in s912D(a)(iii) are: Australian National Registry of Emissions Units Act 2011, Banking Act 1959, Carbon Credits (Carbon Farming Initiative) Act 2011, Clean Energy Act 2011, Financial Sector (Collection of Data) Act 2001, Financial Sector (Shareholdings) Act 1998, Financial Sector (Transfers of Business) Act 1999, Insurance Acquisitions and Takeovers Act 1991, Insurance Act 1973, Insurance Contracts Act 1984, Life Insurance Act 1995, Retirement Savings Accounts Act 1997, Superannuation Industry (Supervision) Act 1993 and Superannuation (Resolution of Complaints) Act 1993 (CR r7.6.02A).

Failure to comply with CA s912D(1) is an offence punishable by a fine of 50 penalty units and/or imprisonment for 1 year for individuals and a fine of 250 penalty units for bodies corporate. Those who aid, abet, counsel or procure the offence are liable to the same penalty.

ASIC has taken enforcement action in relation to breaches of s912D. In May 2007, Top Quartile Management Ltd was convicted and fined $10,000 in the Melbourne Magistrates Court after pleading guilty to 6 charges of failing to report to ASIC breaches of the Corporations Act that occurred between August 2004 and August 2005 (see ASIC Media Release 07-136).

See generally ASIC Regulatory Guide 78 Breach reporting by AFS licensees.

For an overseas example of failure to notify the regulator of a serious contravention of the law, see the Hong Kong SFC's announcement dated 30 July 2015 that it had fined Nomura International (Hong Kong) Limited HK$4.5 million for failing to report significant misconduct by a former trader in a timely manner. On 11 June 2013, Nomura Hong Kong informed the SFC that Mr X, a trader on secondment from Nomura Securities in Japan, had incurred a US$3.3 million trading loss on 23 May 2013 and that he had been sent back to Japan on 5 June 2013. However, the SFC subsequently found out that at the time of the 11 June Report, Nomura Hong Kong already knew Mr X had admitted to making false entries in Nomura Hong Kong’s risk management system to conceal the real risk exposure of his trades and to providing false information to Nomura Hong Kong. Yet, none of these matters were disclosed to the SFC immediately when they should have been under the applicable Code of Conduct. The SFC further found that by 19 June 2013, Nomura Hong Kong had already prepared a draft preliminary report of its investigation on Mr X’s trading activities, but it did not provide the report or its subsequent drafts to the SFC until the SFC made further enquiries almost a month later.

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Authorised Representatives

CA s911B – Only Certain Persons to Act on Behalf of Licensees
A person (the provider) must only provide a financial service in this jurisdiction on behalf of another person (the principal) who carries on a financial services business if [paraphrasing]:
(a)   the principal is a licensee and the provider is an employee or director of the principal or a related body corporate;
(b)   the principal is a licensee and the provider is an authorised representative of the principal;
(c)   the principal is a licensee, the provider is an employee of an authorised representative of the principal and the service is the provision of a basic deposit product or of a facility for making non-cash payments that is related to a basic deposit product, or is the provision of a financial product of a kind prescribed by the regulations for these purposes;
(d)   the provider holds their own Australian financial services licence covering the provision of the service; or
(e)   if the principal (rather than the provider) provided the service, the principal would not need an AFSL because the provision of the service would be exempt under s911A(2).
Penalty: 200 penalty units and/or imprisonment for 2 years for individuals, 1,000 penalty units for bodies corporate.

In the case of (a), (b), (c) and (d), the licence in question must cover the provision of the services. In the case of (b) and (c), the authorisation given to the provider must authorise the provision of the services.

Paragraphs (a), (b) and (c) only apply if the provider is not itself a financial services licensee, unless the principal is an insurer and the provider is acting under a binder given by the principal (s911B(2)).

In the case of (a), the provider must not be an employee, director or authorised representative of another unrelated licensee or of a related body corporate of an unrelated licensee. In the case of (b), if the provider is an employee or director of another unrelated licensee or of a related body corporate of another unrelated licensee and provides services on behalf of that other licensee, then they must only do so as an authorised representative of that second licensee. These qualifications are needed so that the liability provisions where a person acts as authorised representative for more than one principal are triggered and operate appropriately (see below).

CA s916A – Authorised Representatives
A financial services licensee may give a person (the authorised representative) a written notice authorising the person, for the purposes of Chapter 7, to provide a specified financial service or financial services on behalf of the licensee (s916A(1)). The authorisation may be revoked at any time by the licensee giving written notice to the authorised representative (s916A(4)).

Representatives may be authorised to provide all of the services covered in a principal's licence or a subset of those services (s916A(2)).

An authorisation is void to the extent that it purports to authorise a person to provide a financial service that is not covered by the licensee’s licence or contrary to a banning order or disqualification order (s916A(3)).

CA s916C permits an authorised representative to act for more than one licensee but only where each licensee has consented to the person also being the representative of each of the other licensees, or each of those licensees is a related body corporate of each of the other licensees.

As a general rule, a financial services licensee is prohibited by s916D from acting as the authorised representative of another financial services licensee. The only circumstances in which this may be permitted is where a binder exists in relation to financial services provided in relation to insurance (s916E). A binder is an authorisation given to a person by an insurer, to either enter into risk insurance contracts on behalf of the insurer or deal with and settle risk insurance claims against the insurer. This exception accommodates a long standing practice in the risk insurance industry.

Note that an authorised representative can only act "on behalf of a licensee". They cannot act on their own behalf. ASIC made a point of this in 2015 in its action against Boca Global Financial Group, requiring it to remove potentially misleading statements on its website suggesting that Boca was ASIC regulated or authorised to provide financial services in Australia. Boca was neither authorised to provide financial services in Australia under an Australian financial services licence nor exempted from holding a licence. It was previously appointed as a corporate authorised representative of an AFSL holder on 23 January 2015 but that appointment had ceased on 29 September 2015. ASIC made the observation that even at the time Boca was a corporate authorised representative, it would not have been able to lawfully provide some of the financial services in Australia advertised on its website because, as an authorised representative, Boca could only be authorised to provide a specified financial service on behalf of' a licensee, and not on its own behalf. ASIC further observed that authorised representatives that purport to issue financial products on their own behalf could expose themselves to regulatory action for unlicensed conduct and that licensees that allowed their authorised representatives to act this way could also risk regulatory action for failing to adequately supervise their representatives (see ASIC Media Release 15-340MR).

CA s916B – Sub-authorisations
•     Subject to the exception below, an authorised representative of a financial services licensee cannot, in that capacity, make a person their authorised representative or an authorised representative of the licensee (s916B(1)) and any purported authorisation is void (s916B(2)).
•     An authorised representative of a financial services licensee may, in that capacity and with the written consent of the licensee, give an individual, or specified class of individuals, a written notice authorising them to provide a specified financial service or financial services on behalf of the licensee (s916B(3), as modified by r7.6.08(1)). An authorisation given to such an individual may be revoked at any time by the licensee or by the authorised representative that gave the individual the authorisation by giving written notice to the individual (s916B(7), as modified by r7.6.08(1)).

CA s916B(3A) (introduced by r7.6.08(2)) provides that an individual who is authorised as mentioned in s916B(3) cannot, in that capacity, authorise another person under s916C(3).

CA s916F – Requirement to Notify ASIC of Authorisations
•     A person who authorises a representative to provide a financial service under s916A or 916B must lodge with ASIC a written notice with the prescribed details within 15 business days of doing so (s916F(1)).
•     However this does not apply to an authorisation given by an authorised representative to its employees under s916B(3) if the authorisation only permits:
  •     general advice or dealing in relation to a general insurance product, a consumer credit insurance product, a cash management trust interest or a FHSA product; or
  •     personal advice, general advice or dealing in relation to a basic deposit product or a facility for making non-cash payments that relates to a basic deposit product (s916F(1AA) and rr7.6.08(3) and 7.6.04A).

The prescribed details are: (a) the name and business address of the representative; (b) details of the authorisation, including the date on which it was made and what the representative is authorised to do on behalf of the relevant licensee; and (c) details of each other financial services licensee on behalf of whom the representative is an authorised representative (s916F(2)).

A person must also notify ASIC, by lodging a written notice, within 10 business days if: (a) the person authorised a representative under s916A or 916B and there is a change in any of the prescribed details relating to the representative; or (b) the person revokes an authorisation (s916F(3)).

Where the exception in s916F(1AA) applies, the authoriser must provide information about the representative and the representative’s authorisation when requested.

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Liability for Conduct of Representatives

CA s769B – General Liability for Conduct of Directors, Employees and Agents
(1)   Conduct engaged in on behalf of a body corporate:
  (a)   by a director, employee or agent of the body, within the scope of the person’s actual or apparent authority; or
  (b)   by any other person at the direction or with the consent or agreement (whether express or implied) of a director, employee or agent of the body, where the giving of the direction, consent or agreement is within the scope of the actual or apparent authority of the director, employee or agent;
  is taken … to have been engaged in also by the body corporate.
(2)   Conduct engaged in by a person (for example, the giving of money or property) in relation to:
  (a)   a director, employee or agent of a body corporate, acting within the scope of their actual or apparent authority; or
  (b)   any other person acting at the direction or with the consent or agreement (whether express or implied) of a director, employee or agent of a body corporate, where the giving of the direction, consent or agreement is within the scope of the actual or apparent authority of the director, employee or agent;
  is taken … to have been engaged in also in relation to the body corporate.
(3)   If, in a proceeding under this Chapter in respect of conduct engaged in by a body corporate, it is necessary to establish the state of mind of the body, it is sufficient to show that a director, employee or agent of the body, being a director, employee or agent by whom the conduct was engaged in within the scope of the person’s actual or apparent authority, had that state of mind. For this purpose, a person acting as mentioned in s769B(1)(b) is taken to be an agent of the body corporate concerned.

CA s769B sets out the general principles governing corporate criminal and civil responsibility for the purposes of Chapter 7. This operates to the exclusion of the general principles of corporate criminal responsibility found in Part 2.5 of the Commonwealth Criminal Code, which we look at briefly in lecture 2 (see CA s769A).

There are similar provisions to ss769B(1)-(3) in ss769B(4)-(6) for employees and agents of persons who are not bodies corporate.

Note that CA s769B(7) provides that nothing in s769B or in any other law (including the common law) has the effect that, for the purposes of Part 7.7 or 7.7A, a financial service provided by person in their capacity as an authorised representative of a financial services licensee is taken, or taken also, to have been provided by that financial services licensee. There are special rules in ss917A-917F, covered below, that govern the liability of the licensee for the conduct of its authorised representatives in these scenarios.

Similarly, CA s769B(8) provides that nothing in s769B or in any other law (including the common law) has the effect that, for the purposes of Division 2 of Part 7.9, conduct engaged in by a person in their capacity as a "regulated person" is taken, or taken also, to have been engaged in by another "regulated person". Part 7.9 has its own stand-alone liability regime for these purposes.

CA s910A – Definition of Representative
Representative of a person means:
(a)   if the person is a financial services licensee:
  (i)   an authorised representative of the licensee;
  (ii)   an employee or director of the licensee;
  (iii)   an employee or director of a related body corporate of the licensee; or
  (iv)   any other person acting on behalf of the licensee; or
(b)   in any other case:
  (i)   an employee or director of the person;
  (ii)   an employee or director of a related body corporate of the person; or
  (iii)   any other person acting on behalf of the person.

 

CA – Responsibility of Licensee for Representatives
•     A financial services licensee is responsible for the conduct of its representatives relating to the provision of financial services on which a client could reasonably be expected to rely and on which the client in fact relied in good faith (s917A(1), in conjunction with ss917B and 917C - see below).
•     That responsibility extends to liability for any loss or damage suffered by the client as a result of the conduct of the representative (s917E).
•     The client has the same remedies against the licensee that the client has against the representative, and the licensee and the representative (along with any other licensees who are also responsible) are all jointly and severally liable to the client in respect of those remedies (s917F).
•     An agreement is void in so far as it purports to alter or restrict the operation of ss917B, 917C, 917D or 917E (s917F(5)).

These provisions do not relieve representatives of any liability they may have to a client or the licensee (s917F(4)).

CA s917B - Representatives of Only One Licensee
If the representative is the representative of only one financial services licensee, the licensee is responsible for the conduct of the representative, whether or not the representative’s conduct is within authority.

"Within authority" is defined in s917A to mean, in the case of an employee, within the scope of their employment; in the case of a director, within the scope of their duties as a director; in any other case, within the scope of the authority given by the licensee.

CA s917C - Representatives of Multiple Licensees
Where a representative acts for multiple licensees, those licensees will be responsible as follows:
•     where the person is the representative of only one of those licensees in respect of a particular class of financial service to which the conduct relates - that licensee is responsible, whether or not that conduct is within authority, and any other licensees for whom the representative acts will not be responsible (s917C(2));
•     where a person is the representative of more than one of those licensees in respect of a particular class of financial service to which the conduct relates, the conduct relates to a particular kind of financial product prescribed by regulations made for these purposes and the conduct is within authority in relation to only one or some of those licensees - that licensee is solely responsible or those licensees are jointly and severally responsible (as the case may be), and any other licensees for whom the representative acts will not be responsible (s917C(3));
•     in all other cases, all of the licensees are jointly and severally responsible for the conduct, whether or not the representative's conduct is within authority in relation to any of them (s917C(4)).

CA s917C(3) was modified by the Corporations Legislation Amendment (Simpler Regulatory System) Act 2007 with general insurance products in mind, so that a licensee authorising a representative to advise on or deal in a particular type of general insurance product would not be liable for acts of the authorised representative in relation to other types of general insurance products.

CR r7.1.04CA provides that licensees are not jointly and severally liable for the conduct of their authorised representatives where they provide financial services in relation to motor vehicle insurance, home building insurance, home contents insurance, sickness and accident insurance, consumer credit insurance and travel insurance.

CA s917D - Exception if Lack of Authority is Disclosed to Client
A financial services licensee is not responsible under ss917B or 917C for the conduct of their representative if:
(a)   the conduct is not within authority in relation to the licensee (or in relation to any of the licensees, if there were more than one);
(b)   the representative disclosed that fact to the client before the client relied on the conduct; and
(c)   the clarity and the prominence of the disclosure was such as a person would reasonably require for the purpose of deciding whether to acquire the relevant financial service.

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Miscellaneous Licensing Related Matters

CA s911C - Prohibition on Holding Out
A person must not hold out:
(a)   that the person has an Australian financial services licence;
(b)   that a financial service provided by the person or by someone else is exempt from the requirement to hold an Australian financial services licence;
(c)   that, in providing a financial service, the person acts on behalf of another person;
(d)   that conduct, or proposed conduct, of the person is within authority (within the meaning of Division 6) in relation to a particular financial services licensee;
if that is not the case.
Penalty: 50 penalty units and/or imprisonment for 1 year for individuals, 250 penalty units for bodies corporate.

 

CA s912F - Obligation to Cite Licence Number in Documents
Whenever a financial services licensee identifies itself in a document of a kind specified in regulations made for these purposes, the document must include the licensee’s licence number.
Penalty: 10 penalty units for individuals, 50 penalty units for bodies corporate.

CR 7.6.01C specifies the following documents for these purposes: (a) a Financial Services Guide; (b) a supplementary Financial Services Guide; (c) a Product Disclosure Statement; (d) a supplementary Product Disclosure Statement; (e) a Statement of Advice; (f) an application form for an application under CA s1016A; (g) a document containing information required by regulations made under CA s1017DA; (h) a document prepared for CA s1017B notifying a person of changes and events; (i) a Replacement Product Disclosure Statement; and (j) a periodic statement under CA s1017D.

CA 923A - Restriction on Use of Expressions Implying Independence
It is an offence for a person to use the words ‘independent’, ‘impartial’ or ‘unbiased’ (or like words or expressions) in a financial services business or in the provision of a financial service unless:
•     the person and, where relevant, their employers or associates do not receive commissions (apart from commissions that are rebated in full to clients), remuneration based on the volume of business placed with product issuers, or other gifts or benefits from product issuers which may reasonably be expect to influence them;
•     the person in providing financial services operates free from any direct or indirect restrictions on the financial products in respect of which they provide financial services (excluding restrictions imposed under the Act or regulations or by way of licence conditions); and
•     the person operates without any conflicts of interest that might otherwise be created by their associations or relationships with product issuers that might reasonably be expected to influence the person in providing financial services.
Penalty: for individuals 10 penalty units, and for bodies corporate 50 penalty units, for each day, or part of a day, in respect of which the offence is committed.

ASIC has clarified its position on the use of 'independently owned' under s923A in Media Release 17-206MR. It considers that words such as 'independently owned', 'non-aligned' and 'non-institutionally owned', and other similar words or expressions, can be used only if a financial adviser satisfies the conditions set out in s923A. This means that if a financial adviser does not receive any commissions or volume-based payments, or other gifts or benefits and has no conflicts of interest or influence from any product issuer, then they can describe themselves as being 'independently owned'. However, if the financial adviser does receive commissions or operates with conflicts of interest, then they will not be permitted to use the term 'independently owned' or other like words or expressions.

CA s923B - Restriction on Use of Vocational Words
It is an offence for a person to use the following words (or like words or expressions) in a financial services business or in the provision of a financial service unless ASIC authorises the use of the words by way of a condition on a licensee's licence:
•    ‘stockbroker’ or ‘sharebroker’;
•    ‘futures broker’;
•    ‘insurance broker’ or ‘insurance broking’;
•    ‘general insurance broker’;
•    ‘life insurance broker’;
•    any other expression prescribed by the regulations.
Penalty: for individuals 10 penalty units, and for bodies corporate 50 penalty units, for each day, or part of a day, in respect of which the offence is committed.

ASIC is only empowered to authorise the use of these words if the licensee is permitted, under the licence, to provide a financial service relating to securities, futures or contracts of insurance (as applicable). The licensee must also be a participant in a licensed financial market, or must act on behalf of the intending insureds, as relevant.

Banking Act ss66, 66A – Restriction on Use of ADI Terms
It is an offence for anyone other than the Reserve Bank or a licensed ADI to use the following words (or like words or expressions) in a financial business without prior consent from APRA:
•    ‘bank’, ‘banker’ or ‘banking’;
•    ‘building society’, ‘credit union’ or ‘credit society’;
•    ‘ADI’ or ‘authorised deposit-taking institution’; or
•    any other word or expression specified in a determination by APRA under s66(5).
Penalty: for individuals 50 penalty units, and for bodies corporate 250 penalty units, for each day, or part of a day, in respect of which the offence is committed.

APRA has published Guidelines on the Implementation of BA s66 .

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