House of Representatives

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)

12 Financial services disclosure

Preliminary

12.1 Proposed Part 7.7 imposes obligations on financial services licensees and authorised representatives to provide prescribed disclosure documents to retail clients. Part 7.7 therefore achieves one of the main policy aims of the FSR Bill, to ensure that consumers of financial products and services receive adequate information about those products and services.

12.2 Part 7.7 applies to both financial services licensees and authorised representatives. Where a licensee is acting as an authorised representative for another licensee in respect of the financial service provided to the client, the first-mentioned licensee is treated as an authorised representative for the purposes of the provisions in Part 7.7 (see proposed section 940A).

12.3 The Part does take into account, in proposed section 940B, that there may not be a reasonable opportunity to give a document, information or statement as required by Part 7.7. In that situation, a failure to provide the document or other information is not a contravention of the provisions. However, the providing entity cannot escape the obligation to provide disclosure merely by failing to make reasonable inquiries of the client to obtain the latters address or fax number, where the client has not provided these.

12.4 Of course, to be effective disclosure, the client must actually receive the prescribed disclosure documents, information or statements. Proposed section 940C therefore outlines the means by which providing entities may provide the relevant information to clients. Unless the requirements of the provision are satisfied, the giving of the document, information or statement will not be effective.

Financial services guide

General requirement to provide FSG

12.5 As a general rule, financial services licensees and authorised representatives who provide financial services to retail clients are required to give those retail clients a Financial Services Guide (FSG) (see proposed sections 941A and 941B).

12.6 The purpose of the FSG is to ensure that retail clients receive key information about the type of services being offered by a financial providing entity. The provisions relating to FSGs are based on requirements applying under both the existing Corporations Law and life insurance regimes. However, the FSR Bill extends these obligations to financial services offered in respect of all financial products regulated by the Bill.

Exceptions to requirement to provide an FSG

12.7 Proposed section 941C sets out five exceptions to the general requirement that a retail client must be given an FSG. These exceptions are:

•

where the client has already received an FSG that contains all of the prescribed information;

•

where the providing entity is a product issuer and, in providing the service, is doing no more than dealing in its own products. The basis for this exception is that the information relevant to the client that would otherwise be disclosed in the FSG will be contained in the Product Disclosure Statement (PDS) provided by the product issuer under proposed Division 2 of Part 7.9;

-

however, where an authorised representative of a product issuer or a third party financial services licensee or its authorised representatives deals in the financial product, an FSG must be provided to the client;

-

also, where a product issuer provides other services such as advice, an FSG will be required;

-

the exception also does not apply in relation to a dealing in derivatives, as a licensee who effects a trade on a financial market on behalf of a client will be regarded as the product issuer, and will therefore have to provide a PDS. In addition to their role as product issuer, such licensees are also performing intermediary services which should be subject to disclosure under the FSG;

•

where the providing entity is the responsible entity of a managed investment scheme and the financial service provided is merely the operation by the responsible entity of that scheme. The basis for this exception is that the information relevant to the client that would otherwise be in the FSG, will be contained in the PDS provided for each financial product offered as part of the scheme.

-

Where a responsible entity deals in its own products, the product issuer exemption discussed above would apply.

-

And where a responsible entity provides other services, such as advice, an FSG would be required:

•

where general advice is provided in a public forum. However, the providing entity must provide retail clients with the name of the provider and contact details, and information about any associations or relationships between the providing entity and the issuers of any financial products, where those associations or relationships are capable of influencing the providing entity in providing the general advice. Where the providing entity is an authorised representative, details about the licensee for whom they act must also be provided;

•

where the financial service is a dealing in or otherwise relates to a basic deposit product or a facility for making non-cash payments that is related to a basic deposit product. This exception recognises that consumers generally understand the nature of basic deposit products and therefore do not require extensive disclosure in relation to such financial products. However, if the exception applies, the client must be given the information that would normally be included in an FSG under proposed paragraphs 942B(2)(a) and (h), or paragraphs 942C(2)(a) and (i), as the case requires;

•

where the regulations specify other exemptions. However, no exemptions by way of regulations are contemplated at this stage.

Timing of giving of FSG

12.8 As a general rule, the FSG must be given to the retail client as soon as practicable after it becomes apparent to the providing entity that the financial service will be provided to the client. In any event, the FSG must be given to the client before the financial service is provided (see proposed section 941D).

12.9 It is anticipated that the FSG would in most instances be given to the retail client at first contact with that client. For example, an FSG should be given to a client:

•

when the client attends a first meeting with the providing entity; or

•

where contact is by way of phone, fax or other electronic means - the FSG should be faxed, sent by electronic mail or posted to the client as soon as possible after first contact is made.

Exception in time critical cases

12.10 Where a client instructs the providing entity to provide a financial service immediately and it is not practicable to give the FSG to the client before the service is provided, the client must be given the FSG within five days. In addition, before the service is provided the providing entity must give the client an oral statement containing FSG information that is relevant to the service the client has requested. The oral statement must include information about remuneration or other benefits and information about any associations or relationships with product issuers capable of creating conflicts of interest (proposed section 941D).

Information must be up-to-date

12.11 Retail clients must be provided with an up-to-date FSG before a financial service is provided (proposed sections 941E and 941F, however, there is no liability in relation to a contravention of proposed section 941E). Where a series of financial services are provided to a client, an FSG will only need to be given at the outset unless the information in the original FSG ceases to be accurate in some material respect. In these circumstances the client must be provided with an updated FSG or with a Supplementary Financial Services Guide (SFSG) before a service is provided.

Content and authorisation of FSG

12.12 The cover or front of each FSG must include the title Financial Services Guide; however this may be abbreviated to FSG in any other part of the document (proposed section 942A).

FSG given by financial services licensee - main content requirements

12.13 The content of the FSG will differ depending on whether the providing entity is a financial services licensee or an authorised representative (see proposed sections 942B and 942C respectively). The differences stem from the requirement for authorised representatives to refer in the FSG to the existence of the licensee.

12.14 The content requirements have been formulated in such a way as to ensure that consumers receive key information required to make informed decisions about whether to acquire a financial service that is offered, while at the same time providing flexibility for industry in determining the level of information that should be included.

12.15 Proposed subsections 942B(3) and 942C(3) provide that the level of information required is that which a person would reasonably require for the purpose of making a decision whether to acquire financial services as a retail client.

12.16 Under proposed section 942B, the FSG must contain the following information where a financial services licensee is the providing entity:

•

the name and contact details of the providing entity;

•

any special instructions about how the client may provide instructions to the providing entity;

•

information on the kinds of financial services offered by the providing entity, including the range of financial products to which those services relate;

•

information about for whom the licensee acts when providing financial services. It is anticipated that this information would be most relevant where the providing entity acts on behalf of the client. This would be particularly relevant where the providing entity under proposed section 923B was authorised to use the term insurance broker. In these circumstances, in addition to informing the client that the licensee acts on their behalf, it is expected that the FSG would include an explanation of what acting on behalf of a client means and how this differs from the relationship the client would have with a licensee who did not act on the clients behalf;

•

information about the remuneration, commission and benefits received by the providing entity, a related body corporate, a director or employee of the providing entity or related body corporate, an associate of any of these or any other person prescribed by the regulations for the purposes of this provision. The purpose of disclosure of commissions, fees and charges in the FSG is so that the client will understand how they will be paying for the financial service they are being offered (as distinct from payments for a specific financial product). Therefore, the client must be informed if they have to pay an up front fee for the financial service and how much that fee will be, or whether the provider will be remunerated for their services by way of salary, or by commission resulting from the sale of specific financial products, or by a combination of means. The regulations may also require the providing entity to provide the client with more detailed information on remuneration;

•

information about any associations or relationships between the providing entity (or any related body corporate) and the issuer of a financial product that might reasonably be expected to influence the providing entity in providing financial services. The purpose of this requirement is to ensure that the client is alerted to potential influence on the service provided, for example, cross-ownership links or indebtedness of providing entity to product issuers;

•

where a providing entity provides execution-related telephone advice (as defined in proposed section 946B) and does not usually provide clients with a record of that advice unless requested, the FSG must include a statement alerting the client to their right to request a record of that advice and how they make such a request;

•

information about the internal and external dispute resolution procedures to which the client has access;

•

where a providing entity acts under a binder, they will be required to disclose to the client the services provided under the binder and the significance of those services being provided under a binder;

•

where a providing entity is a participant in a licensed financial market or a licensed clearing and settlement facility, they must include in the FSG a statement to that effect;

•

any other statements or information prescribed by the regulations.

12.17 A flexible regulation-making power is included to both disapply disclosure of certain information in specified circumstances and also to prescribe in more detail the information required under one of the above headings in particular or general situations.

12.18 The FSG must include the date of preparation, and may also contain other information in addition to that required to be included.

FSG given by authorised representative - main content requirements

12.19 The content requirements for an FSG given by an authorised representative are based on those requirements for an FSG provided by a licensee, but expanded to require information about the licensee(s) who have authorised the representative and information, where relevant, about the employer of the authorised representative (proposed section 942C). A flexible regulation making power is also included in proposed section 942C.

12.20 Again, the FSG must include the date of preparation, and may also contain other information in addition to that required to be included.

Financial Services Guide may consist of two or more documents

12.21 To provide flexibility in how FSGs are prepared and presented to clients, proposed section 942D provides that an FSG may be made up of two or more documents which, when taken together, contain all the required information. These documents must all be given to the client at the same time. Also, each document must include on its cover or front, a statement that the document is part of an FSG and that identifies the other related documents.

12.22 However, to ensure that FSGs are comparable among different providing entities, a regulation-making power is provided to enable additional requirements to be imposed where an FSG is comprised of multiple documents.

12.23 Proposed section 924E prohibits the provision to a client of an FSG that has been altered after the preparation date noted in the FSG, but before giving it to the client - unless the alteration was made by or with the authority of the financial services licensee who provided the FSG to the client, or the licensee(s) who authorised the distribution of the FSG via authorised representatives. Where the alteration is material, the date on the FSG must be changed to reflect the date of alteration.

Supplementary Financial Services Guides (SFSG)

12.24 A SFSG allows a person who has prepared an FSG to update it, or to correct an omission or a misleading or deceptive statement in the original FSG (proposed section 943A). An authorised representative may only give a person such a document where this is authorised by the licensee.

12.25 Proposed section 943B requires such a document to bear the title Supplementary Financial Services Guide on its cover or on or near the front of it. In other parts of the document, this may be abbreviated to SFSG.

12.26 The SFSG must also state that it is an SFSG, identify the FSG that it supplements and include a statement that it is to be read with that FSG and any other SFSGs. The SFSG must include a preparation date. Where it is to be distributed by an authorised representative, it must contain a statement that this distribution is authorised by the licensee (proposed section 943C).

12.27 Proposed section 943D provides for the effective incorporation of the information in the SFSG into the original FSG.

12.28 Proposed section 943E makes it clear that an SFSG may be used to update an FSG, where a new FSG may otherwise be required to be given to the client. The provision requires that an FSG have been provided to the client at some point.

12.29 Proposed section 943F mirrors section 942E (in relation to the alteration of FSGs) in the context of an SFSG.

Additional requirements for personal advice provided to a retail client

12.30 These provisions only apply where personal advice (as defined in proposed section 766B(3)) is provided to a retail client. The provisions apply both where the advice is provided by a financial services licensee and where the advice is provided by an authorised representative (proposed section 944A).

Requirement to have a reasonable basis for the advice

12.31 Under proposed section 945A, where personal advice is provided to a retail client, the providing entity must have a reasonable basis for that advice. The providing entity is required to ascertain the clients objectives and their financial situation and needs, investigate and consider the options available to the client, and base the advice on that consideration and investigation.

12.32 It is an offence to contravene this provision. However, where an authorised representative contravenes this provision, they have a defence if they acted in reasonable reliance on information given to them by one of their licensees. Subsection (3) then places an obligation (with an appropriate offence) on a licensee to take reasonable steps to ensure that authorised representatives comply with requirement to have a reasonable basis for advice.

12.33 The level of inquiry and analysis required will vary from situation to situation and will depend on the advice requested by the client. The providing entity need only obtain and analyse sufficient information about the client to provide the advice requested or proffered. So, for example, a comprehensive analysis of the clients full financial position may not be necessary where the client has sought personal advice on a specific product.

12.34 It should be noted that there is no obligation on a providing entity to provide personal advice. A providing entity from whom personal advice is sought may decline to provide the advice (and of course, where the providing entitys licence or authorisation does not cover the provision of advice, would be obliged to decline to give the advice).

Obligation to warn client if advice based on incomplete or inaccurate information

12.35 Where a providing entity gives a client personal advice based on information about the client that is incomplete or inaccurate, the providing entity must warn the client about the limitations of the advice and that the client should consider the appropriateness of the advice before acting on it (proposed section 945B). It is anticipated that advice based on incomplete or inaccurate information may be provided in circumstances where the retail client is unwilling to provide information requested by the providing entity but still seeks the advice.

12.36 The warning must be provided to the client at the same time as the advice is provided and by the same means as the advice is given.

12.37 In relation to contraventions of proposed section 945B, it would be inappropriate to give authorised representatives a defence, and place a corresponding obligation on licensees, as the offence is dependent on the providing entitys actual state of mind (see approach above in relation to proposed section 945A, for example). The authorised representatives view of whether the information they had was incomplete or inaccurate would be affected by their individual discussions and interaction with their client. Simply requiring an authorised representative to comply with instructions or directions supplied by their licensee would not necessarily be adequate to ensure compliance with this provision.

Requirement for a Statement of Advice to be given

12.38 Where a retail client is given personal advice, the providing entity must provide the client with a Statement of Advice (SoA). The SoA may be the means by which advice is given, or a separate record of the advice (proposed section 946A).

Exception for execution-related telephone advice

12.39 Proposed section 946B sets out two exceptions to the requirement to give a SoA. The first exception applies where the advice is execution-related telephone advice. This is defined as advice given by telephone, relating to financial products that are able to be traded on a licensed financial market that is given by the providing entity as an integral part of the execution or transfer of, or order for, those financial products and is advice for which no fee is charged in addition to the commission for the execution of the transfer or order.

12.40 This exception is based on the existing Corporations Law regime exception for execution-related telephone advice provided in relation to securities. This exception has been extended to cover all financial products that are able to be traded on a licensed financial market. Where this exception applies, the providing entity does not have to give the client a SoA if the client agrees to this, and the FSG given to the client discloses that the client may request a record of advice, and the providing entity maintains a record of the advice in accordance with the regulations. It is proposed that the regulations will require a record of advice to be kept or a written summary of recommendations made and the basis of those recommendations.

12.41 While in these circumstances the providing entity is not required to provide a SoA, it must - at the time the advice is given - inform the client of any commission, fee, benefit or advantage that the providing entity or an associate will receive in connection with the advice, any other interests of the providing entity or an associate, and any associations or relationships between the providing entity or an associate and a product issuer that might reasonably be expected or be capable of influencing the providing entity in providing the advice.

12.42 The providing entity must comply with a request made by a client for a record of advice as described in the FSG. Failure to comply with this provision is an offence.

12.43 The objective of these provisions is to provide the client with the consumer protections afforded by the SoA and related disclosure requirements, while at the same time ensuring that the giving of telephone-executed advice and the ability of the client to act quickly on that advice is not unduly hindered.

Exception for basic deposit products

12.44 The second exception to the requirement to provide a SoA applies to personal advice provided in relation to basic deposit products or a facility for making non-cash payments that relates to a basic deposit product. Again, however, the providing entity must - at the time the advice is given - inform the client of any commission, fee, benefit or advantage that the providing entity or an associate will receive in connection with the advice, any other interests of the providing entity or an associate, and any associations or relationships between the providing entity or an associate and a product issuer that might reasonably be expected or be capable of influencing the providing entity in providing the advice.

Timing of giving Statement of Advice

General rule

12.45 As a general rule, if the SoA is given separately to the advice, the SoA must be given to the client when the advice is provided, or as soon as practicable after the giving of advice, but in any case before the providing entity provides the client with any further service arising out of the advice (see proposed section 946C). For example, where the advice recommends the purchase of a financial product, the provider of the advice must give the client the SoA before selling the client the product.

12.46 If the SoA is not given to the client when the advice is provided, the providing entity must inform the client orally of:

•

any commission, fee, benefit or advantage, which the providing entity (or a related body corporate, a director or employee, or an associate) will receive in connection with the advice;

•

any other interests of the providing entity or an associate, and any associations or relationships between the providing entity, or an associate, and a product issuer that might reasonably be expected or be capable of influencing the providing entity in providing the advice; and

•

if the advice includes a recommendation to replace existing financial products, details of any charges the client will incur in replacing the business, any pecuniary or other benefits that the client may lose as a result of replacing business, and any other significant consequences for the client of replacing the business.

Exception in time critical cases

12.47 An exception to the general timing rule is provided in time critical situations (proposed subsection 946C(3)). Where a client instructs the providing entity to immediately provide a financial service arising out of the advice and it is not reasonably practicable for the providing entity to give the SoA before the service is provided, the SoA must be provided:

•

within five days after providing the financial service; or

•

where the service relates to a financial product with a cooling-off period (proposed section 1019B), before the commencement of the cooling-off period.

Content of Statement of Advice

Title of Statement of Advice

12.48 The cover or front of each SoA must include the title Statement of Advice. In other parts of the document the abbreviation SoA may be used (proposed section 947A).

Statement of Advice given by financial services licensee - main content requirements

12.49 The content of the SoA will differ depending on whether the providing entity is a licensee or an authorised representative. The differences derive from the requirement for authorised representatives to refer in the SoA to the existence of the licensee and, where relevant, an employer (see proposed sections 947B and 947C).

12.50 The content requirements are intended to ensure that consumers receive information necessary to make informed decisions about whether to act on the advice, while at the same time allowing industry some flexibility in determining the level of information that should be included.

12.51 Subsections 947B(3) and 947C(3) provide that the level of detail of information required is that which a person would reasonably require for the purpose of making a decision whether to act on the advice provided.

12.52 Where the licensee is the providing entity, the SoA must contain the following statements and information:

•

a statement setting out the advice;

•

an explanation of the basis on which the advice is given. This should canvas the consideration given to the clients objectives, financial situation and needs and how the advice will address those objectives, financial situation and needs. It should illustrate how the recommendation made to the client addresses the request for advice originally made by the client, taking account of subsequent investigations and considerations on the part of the providing entity;

•

name and contact details of the providing entity;

•

information about any remuneration (including commission) or any other benefits that the providing entity, a related body corporate, a director or employer, or an associate will receive in connection with the advice that might reasonably be expected to be capable of influencing the providing entity in providing the advice;

•

details of any benefit or advantage (whether or not pecuniary) which may reasonably be expected to influence the financial providing entity in giving the advice must be provided. Wherever possible, disclosure should be in dollar amounts. Where this is not possible, percentage amounts or written description must be provided. Benefits disclosed must include commission, soft dollar remuneration, sales quotas and volume bonuses;

•

information about any other interests, whether pecuniary or not, of the providing entity or an associate that might reasonably be expected to be capable of influencing the providing entity in providing the advice;

•

information about any association or relationships between the providing entity or an associate and product issuers that might reasonably be expected to be capable of influencing the providing entity in providing the advice;

•

where applicable, the warning required in proposed section 945B that the advice provided may be based on incomplete or inaccurate information and that the client should consider the appropriateness of the advice before acting on it;

•

other information required by regulations.

12.53 A flexible regulation-making power is included to both disapply disclosure of certain information in specified circumstances and also to prescribe in more detail the information required under one of the above headings in particular or general situations.

12.54 In addition to information required to be included in the SoA, the SoA may also contain other information.

Statement of Advice given by authorised representative - main content requirements

12.55 The content requirements for a SoA given by an authorised representative mirror those requirements where the SoA is given by a licensee, but expanded to require information about the licensee(s) who have authorised the representative and, where relevant, information about the employer of an authorised representative (proposed section 947C).

12.56 The employer of an authorised representative has been included in these provisions to ensure that, for example, commission splitting between a natural person authorised representative and the corporate authorised representative that employs the natural person are disclosed.

Additional requirements when advice recommends replacement of one product with another

12.57 Where a client is advised to replace an existing financial product, specific disclosures are required in the SoA to enable the client to assess the cost of replacing a product and the potential financial loss or loss of benefits that may result (proposed section 947D).

12.58 The objective of this requirement is to alert clients to the disadvantages as well as the advantages of acting on advice to replace an existing product. It is anticipated that this requirement will limit the potential for twisting and churning.

Qualified privilege if providing entity complies with the Division

12.59 Proposed section 948A is based on section 853 of the existing Corporations Law, and provides that a providing entity has qualified privilege in respect of a statement made to a client in connection with providing personal advice, if the providing entity complies with the requirements relating to the provision of personal advice.

Other disclosure requirements

General advice warning

12.60 Where general advice is provided to a retail client, no SoA is required. However, at the time of giving the general advice and by the same means as the general advice is given, the providing entity must warn the client that the advice has been prepared without taking account of the clients objectives, situation and needs and the client should therefore consider the appropriateness of the advice to their situation before acting on the advice (proposed section 949A).

12.61 Warnings must accompany all general advice regardless of the medium used to provide that advice. For contraventions of this provision, the general approach described below has been taken, so that authorised representatives have a defence available to them with a corresponding duty on licensees to ensure that authorised representatives comply.

Regulations may impose disclosure requirements in certain situations

12.62 A regulation making power has been included at proposed section 949B to allow the imposition of disclosure requirements or additional disclosure requirements in the following situations:

•

where a financial service related to an insurance product is provided to a retail client under a binder;

•

where a financial services licensee or authorised representative arranges for a persons instructions to be carried out outside Australia. It is proposed that regulations would be made requiring, where relevant, disclosure to the client that their instructions are to be carried out through an overseas financial market or clearing and settlement facility and the ramifications arising from this;

•

where the person provides a financial service as a member of a declared professional body (DPB);

•

where persons are exempt from the Financial Services Licensee provisions.

12.63 The approach to contraventions of this provision is in accordance with the general approach outlined below. The offence for not providing the information required by the regulations is contained in the Act, rather than the regulations themselves, so that a penalty which includes a period of imprisonment can be applied. This would not be possible for regulations created by offences where it is proposed that the maximum penalty will be 50 penalty units. This approach is a recognition that the disclosure obligations in this provision could be of real significance to a client.

Obligations of members of declared professional bodies who provide advice

12.64 Certain obligations and requirements apply where a member of a DPB provides personal advice to a retail client.

12.65 The providing entity (that is, the member) may only provide advice that is appropriate when assessed in light of the clients objectives, financial situation and needs (see proposed section 950B).

12.66 Proposed section 950C imposes an obligation on the providing entity to inform the client, where appropriate, that the advice provided may be based on incomplete or inaccurate information and that the client should consider the appropriateness of the advice before acting on it. The warning must be given to the client at or before the giving of the relevant advice.

12.67 Proposed section 950D requires the providing entity to disclose details of commissions, fees, benefits and interests received by the entity in connection with the provision of the advice, and that might reasonably be expected to influence the entity in the provision of the advice. The disclosure requirements extends to commissions and other benefits given to associates of the providing entity, and to the DPB and to any associates of the DPB.

12.68 The level of detail required of this information is such that a person would reasonably need to decide whether to act on the advice (proposed subsection 950D(2). The regulations may disapply any of the requirements to disclose information, and may require a more detailed statement of the information.

12.69 Where a client is advised to replace an existing financial product, specific disclosures are required in the SoA to enable the client to assess the cost of replacing a product and the potential financial loss or loss of benefits that may result (proposed section 950E).

Part cannot be contracted out of

12.70 Proposed section 951A provides that a condition of a contract for the acquisition of a financial product or the provision of a financial service is void if it provides that a party to the contract is required or bound to waive compliance with any requirement of Part 7.7 or taken to have notice of any contact, document or matter not specifically referred to in an FSG, SoA or other document given to the party.

General approach to criminal liability

12.71 Criminal liability for contraventions of those provisions of Part 7.7 that relate to the giving of documents or statements to clients by a licensee, authorised representative of a licensee or member of a DPB, is dealt with in Division 7 of Part 7.7. However, Divisions 3 to 5 of Part 7.7 also contain a number of other offences created by the operations of subsection 1311(1); these are indicated by notes under the relevant provisions.

Liability of authorised representatives

12.72 There are a number of provisions in Part 7.7 that relate to the criminal liability of authorised representatives and licensees for failures by authorised representatives to comply with Part 7.7. These rules are designed to ensure that in situations where there has been a contravention of a requirement of Part 7.7, criminal liability falls appropriately on either the licensee or the authorised representative. They ensure that while licensees are generally liable for the ensuring that their representatives comply with the law (in accordance with their obligations in proposed paragraph 912A(c)) they are not made liable for individual actions of authorised representatives, in situations where it is appropriate that the authorised representative is held liable.

12.73 However, where authorised representatives have been given directions or instructions from a licensee and reasonably relies on them, they are generally provided with a defence, as in these situations it is appropriate that the licensee is liable for a failure to provide adequate instructions or directions to their authorised representatives.

12.74 This is achieved in a number of provisions by initially stating that the providing entity that actually contravenes the provision (including an authorised representative) is liable. However, a defence is then provided for an authorised representative who has acted in reasonable reliance on information given to them by one of their licensees. There is then an obligation on the licensee to take reasonable steps to ensure that authorised representatives comply with the particular requirement. It is intended that a licensee will contravene this obligations where they take no steps, as well as where they provide information or instructions, but these are not sufficient to ensure that the authorised representative in complying with them does, in fact, comply with the requirements of Part 7.7.

12.75 This approach recognises that authorised representatives are not subject to the day to day supervision of licensees in the same way that, for example, employees are. It is intended to promote the role of authorised representatives by ensuring that licensees do not face an unnecessarily burdensome liability for their actions (it thus provides an incentive for licensees to authorise representatives), while giving authorised representatives a safe harbour where they act in accordance with directions and information given to them by licensees. It also recognisees the obligation on licensees to properly supervise authorised representatives.

Liability of members of declared professional bodies

12.76 The liability of members of DPBs is different from that of authorised representatives. Generally, members of DPBs are liable for their actions in the same way as licensees, that is, they are responsible for ensuring that their actions comply with proposed Chapter 7 and they do not have the defences available that authorised representatives have.

Liability for disclosure document and statements

12.77 Proposed Division 7 refers to documents or statements that are required to be given by proposed Part 7.7 as disclosure documents or statements. These are defined in proposed section 952B and includes an FSG, an SFSG, a SoA and a range of other statements that are either given instead of these other documents or are required to be given by a member of a DPB.

12.78 Liability for FSGs or SFSGs is dealt with differently from other disclosure documents or statements, although these documents can be prepared by the licensee, authorised representative or a combination of both, they must be authorised by all licensees of an authorised representative. Proposed section 952K makes it an offence for an unauthorised representative to give out an FSG or SFSG where it has not been authorised by their licensee. Proposed section 952M makes it an offence for a person to give someone an FSG or SFSG which has been altered otherwise than in accordance with the licensees authority. Proposed section 952H provides a general obligation on licensees to take reasonable steps to ensure that authorised representatives comply with the requirements of Part 7.7 relating to the provision of disclosure documents or statements. This is consistent with the approach to liability of licensees for their authorised representatives discussed above.

Failure to provide disclosure document or statement

12.79 It will be an offence to fail to give a disclosure document or statement where required by a provision of Part 7.7 (proposed section 952C). It should be noted that this requires that the statement is given at the required time and in the required manner (proposed paragraph 952C(1)(b)). Proposed section 940C details the manner in which a document or statement may be given but is also subject to proposed section 940B which deals with situations in which there has been no reasonable opportunity to provide the document or statement. For authorised representatives, this provision provides a defence for following directions or information provided by a licensee that follows the general approach outlined above.

12.80 In addition to an offence requiring fault elements, a strict liability offence is also provided. This provides greater enforcement flexibility and allows for straightforward and effective enforcement of technical contraventions of the provision relating to, for example, not giving a statement in the required manner or at exactly the right time. Therefore, the strict liability offence has a lower pecuniary-only penalty attached to it.

Providing defective disclosure document or statement

12.81 There are a number of offences related to providing a disclosure document or statement that does not contain the information required or where that information is in some way inaccurate.

When a disclosure document or statement is defective

12.82 For these provisions the term defective is defined in proposed section 952B. Generally, a disclosure document or statement will be defective if it contains a misleading or deceptive statement or does not contain the information required by Part 7.7 and the statement or omission is or would be materially adverse from the point of view of a reasonable person considering whether to act in reliance on the advice.

12.83 This ensures that while there is criminal liability for the making of statements that may be of detriment to clients, the requirement is not overly onerous and may not apply to minor or technical faults or in relation to statements or omissions that could not result in detriment to the person relying on it.

When a disclosure document or statement is given

12.84 For the purposes of these provisions, the giving of a disclosure document or statement means giving it either in a situation where Part 7.7 requires one to be given or the giving of an FSG or SFSG in other situations where the person to whom it is given may rely on the information contained in it (see proposed subparagraph 952D(1)(a)(ii) for an example of this). As FSGs and SFSGs are specially prepared documents, it is appropriate to ensure that the same liability regime applies to them in all situations where they are provided to clients. For other disclosure documents or statements that might be given in situations where they are not required to be given by Part 7.7, other provisions such as the general prohibition on false and misleading statements in proposed section 1041E could apply.

12.85 While the method by which something must be given is set out in proposed section 940C, the offences related to provision of defective documents or statements cover the giving of them by any means, not just those described in that provision.

Providing a disclosure document or statement knowing that it is defective

12.86 Proposed section 952D makes it an offence to give a disclosure document or statement knowing that it is defective. No defence is provided for authorised representatives as the provision requires actual knowledge that the statement or document is defective.

Providing a disclosure document or statement that is defective (whether known to be defective or not)

12.87 Proposed section 952E deals with liability for the giving of a disclosure document or statement that is defective, regardless of whether it is actually known to be defective.

12.88 Licensees and members of DPBs are potentially liable for all disclosure documents or statements that they give. However, authorised representatives are only liable in situations where the disclosure document or statement is not an FSG or SFSG (these other statements are listed in proposed paragraph 952E(3)(a)). Authorised representatives are not liable for FSGs and SFSGs because these have to be authorised by the licensee who is then responsible for their content. Whereas the other disclosure documents or statements are ones which they may prepare and give themselves.

12.89 Where a person is potentially liable, they will have a defence of having taken reasonable steps to ensure that the disclosure document or statement would not be defective (for example, proposed subsection 952E(5)). This defence is in contrast to the current due diligence defence in section 731 of the Corporations Law and is intended to be less onerous than it.

12.90 It is necessary to apply strict liability to the element of the offence that the document or statement was defective. If this is not done then the Criminal Code default element of recklessness could apply and potentially act as an alternative to the take reasonable steps defence.

12.91 For statements for which authorised representatives could be liable under this provision, proposed subsection 952E(6) provides flexibility to the liability regime. It gives an authorised representative a defence where the defective document or statement was given to them by a licensee or was defective because of information (or an omission from such information) given to them by the licensee. This allows these particular documents or statements to be prepared by either the licensee or the authorised representative or a combination of both and ensures that liability for a defect falls appropriately on the responsible party.

Provision of information to an authorised representative by a licensee

12.92 Proposed sections 952F and 952G cover the situations where a licensee may provide to an authorised representative either a defective disclosure document or statement or information for inclusion in such a document or statement that makes it defective. In these situations the authorised representative would not be liable in relation to an FSG or SFSG (proposed section 952E does not make an authorised representative liable for a defective FSG or SFSG) and may not be liable for the defective document or statement in other cases, so it is necessary to provide appropriate offences in relation to the licensee.

12.93 Proposed section 952F will make it an offence for a licensee to:

•

authorise the distribution of an FSG or SFSG or provide an authorised representative with another type of disclosure document or statement to distribute where the licensee knows that the disclosure document or statement is defective; or

•

provide an authorised representative with information knowing that it will be included in a disclosure document or statement if:

-

the licensee knows that the information will make the disclosure document or statement defective; or

-

the licensee knows that the information is not all the relevant information (that is, it omits some matters) and the authorised representative may prepare the disclosure document or statement on the basis that it is all the information on that matter that it is required to contain.

12.94 Proposed section 952F is otherwise similar to proposed section 952D.

12.95 Proposed section 952G deals with the same situations as proposed section 952F but does so where the licensee did not necessarily know that the disclosure document or statement was defective or that the inclusion of the information provided would make it defective, but this was, nevertheless, the case. It has the same relationship to proposed section 952F as proposed 952E does to proposed 952D. A defence of reasonable steps is provided as in proposed section 952E.

12.96 The provision (in proposed paragraph 952G(2)(b)) excludes situations where a disclosure document or statement is defective only because of information that relates to another licensee of the authorised representative. This ensures that where an authorised representative has multiple licensees and, for example, there is information in an FSG that relates only to one of those licensees and that information is defective, other licensees are not liable for it even though they have authorised the FSG. They would, however, be liable under proposed section 952F if they had actual knowledge that it was defective.

When a person finds out that an FSG is defective

12.97 Proposed section 952L ensures that where either a licensee or an authorised representative becomes aware that an FSG or SFSG is defective, steps are taken to either rectify the defect or prevent the document from being given out. It will make it an offence for a licensee who becomes aware that an FSG or SFSG is defective to fail to give an authorised representative a direction to rectify the defect or stop giving out the FSG. It is an offence to contravene such a direction. It is also an offence for a representative who becomes aware that a section 853 FSG or SFSG is defective to fail to inform their licensee.

Formal Requirements

12.98 Proposed section 952I makes it an offence for a licensee to give out an FSG or SFSG themselves or authorise its distribution by an authorised representative where it does not comply with the formal requirements relating to FSGs and SFSGs (such as ensuring that FSG is on the cover of the document or that the document is dated). The offence can only be committed by a licensee as they must authorise and are, therefore, responsible for the content of an FSG or SFSG.

12.99 Proposed section 952J similarly deals with formal requirements of a SoA. This offence is committed by the person who prepares the SoA (including an authorised representative).

12.100 Strict liability applies to the circumstance that the document does not comply with the relevant formal requirements. This is necessary to ensure the effective enforcement of contraventions of these provisions which carry only a low pecuniary penalty and are offences of a technical nature. Otherwise, the fault element of recklessness would apply to this circumstance. Strict liability does not apply to the actual giving or authorising of the statement as the application of the fault element of intention to this conduct would not be particularly difficult to show.

Civil liability

12.101 Subdivision B of Division 7 of Part 7.7 provides people with a civil action for loss or damage for contraventions of provisions of Part 7.7. Proposed section 953B lists the situations where such action may be taken. They include contraventions of certain provisions (such as failure to have a reasonable basis for advice), not providing a disclosure document or statement where required or providing a defective one.

12.102 For the purposes of civil liability, defective is defined in proposed section 953A. It is similar to the definition for criminal liability but does not require the statement of omission to be materially adverse. The materially adverse concept is not appropriate for civil liability, as a person must demonstrate that they have suffered loss or damage as a result of the defect. This in itself establishes that the defect was significant without any need for a requirement of materially adverse.

12.103 Proposed subsection 953B(7) provides that for an action relating to a defective document or statement a person is not liable where they took reasonable steps to ensure that the document or statement would not be defective. This is consistent with the approach taken for criminal liability.

12.104 Proposed subsections 953B(3) and (4) set out who is liable. Generally, the licensee is liable regardless of whether the contravention resulted from conduct of the licensee or an authorised representative. This ensures that clients will always have a licensee to take action against for loss or damage. The only exception is where a person altered an FSG or SFSG without authority from the relevant licensee. In that situation (beyond the control of the licensee) the person who made the alteration is liable. Where more than one licensee is potentially liable, proposed section 917C is used to determine which licensee or licensees jointly are liable.

12.105 In addition to the power to being able to recover loss or damage under these provisions, proposed section 953C also gives the court the power to make additional orders where it thinks these are necessary to do justice between the parties. These orders include declaring a contract void and any additional orders that are necessary or desirable because of that order. These additional orders can include but are not limited to an order for the return of money or payment of an amount of interest.