House of Representatives

Corporations Legislation Amendment (Simpler Regulatory System) Bill 2007

Corporations (Fees) Amendment Bill 2007

Corporations (Fees) Amendment Act 2007

Corporations (Review Fees) Amendment Bill 2007

Corporations (Review Fees) Amendment Act 2007

Explanatory Memorandum

(Circulated by the authority of the Parliamentary Secretary to the Treasurer, the Hon Chris Pearce MP)

Chapter 8 Regulation impact statement: financial services regulation

Background

The Financial Services Reform Act 2001 (FSR Act)

7.1 The FSR Act, which commenced on 11 March 2002, introduced a single licensing regime for financial sales, advice and deALIGNs in relation to financial products; consistent and comparable financial product disclosure; and a single authorisation procedure for financial markets and clearing and settlement facilities. The FSR Act provided the legislative response to a number of recommendations of the Financial System Inquiry, commissioned by the Australian Government in 1997.

7.2 The previous regulation of providers of financial services was product-specific and contained in a number of different Acts and non-legislative instruments. The FSR Act removed unnecessary distinctions between financial products to rationalise compliance obligations and put in place a competitively neutral regulatory system. In addition, it aimed to give consumers a more consistent framework of consumer protection in which to make their financial decisions.

7.3 The FSR Act replaced the existing Chapters 7 and 8 of the Corporations Act with a new Chapter 7. Following a two-year transition period, the changes introduced by the FSR Act took full effect on 11 March 2004.

7.4 During the transition to the new requirements, several issues were raised by industry participants and consumer representatives in relation to the practical operation of the legislation. Many of these issues were dealt with through the making of Corporations Regulations and the passage of the Financial Services Reform Amendment Act 2003 .

7.5 However, following the full implementation of the legislation, and after a reasonable period in which to judge its impact, the Australian Government recognised that concern remained about various aspects of the legislation. Chief among these were aspects of the disclosure requirements.

Refinements to Financial Services Regulation

Refinements to financial services regulation proposals paper

7.6 In May 2005 the Parliamentary Secretary to the Treasurer, the Hon Chris Pearce MP, released a paper titled Refinements to Financial Services Regulation Proposals Paper . The purpose of the paper was to raise for discussion with industry and consumer representatives a number of suggestions for refinements to the legislation to improve its operation, particularly by reducing compliance costs for industry participants, while preserving the consumer protection benefits introduced by the FSR Act.

7.7 The paper complemented a report by the Financial Sector Advisory Council which included recommendations based on the results of a survey of industry experience with financial services regulation since its introduction.

7.8 The intention of the financial services regulation refinements was to:

·
ensure that consumers receive information that is relevant to their needs;
·
reduce the compliance burden on industry; and
·
clarify the intent of the legislative and regulatory framework that applies to the financial services industry.

7.9 Around 40 submissions were received in response to the paper. In addition, the Australian Government held a number of consultation meetings to further discuss the refinement proposals. By December 2005, the refinements were completed, with 18 refinements being implemented by amendments to Corporations Regulations and the remaining seven proposals implemented by ASIC.

7.10 As part of the consultation on the 2005 refinements to financial services regulation, industry provided comments on a number of residual issues which extended beyond the scope of the proposals considered in the Refinements to Financial Services Regulation Proposals Paper . These residual issues were not able to be addressed as part of the refinements project, but the feedback from industry has emphasised the need for further refinements in outstanding areas of concern. These issues were included for discussion in the Corporate and Financial Services Regulation Review Consultation Paper of April 2006.

Corporate and Financial Services Regulation Review Consultation Paper

7.11 On 7 April 2006, the Parliamentary Secretary to the Treasurer, the Hon Chris Pearce MP, released the Corporate and Financial Services Regulation Review Consultation Paper for a six-week consultation period, which ended on 19 May 2006. The consultation paper sought comments from consumer and industry representatives on ideas for improving aspects of corporate and financial services regulation.

7.12 The release of the consultation paper coincided with the release of the Government response to the Rethinking Regulation report of the Taskforce on Reducing the Regulatory Burden on Business, which recommended that the Australian Government establish a further process to enable additional refinements to be made to the operation of the financial services regulatory regime in outstanding areas of concern. These outstanding areas of concern include those which were raised as part of the 2005 refinements, as well as further representations that have been made to Treasury and the Parliamentary Secretary to the Treasurer by industry.

7.13 The consultation paper raised 56 topics in relation to financial services regulation and regulation in relation to company reporting obligations, auditor independence, corporate governance, fundraising, takeovers, collective investments and deALIGN with regulators. Generally, the paper sought comments on whether there was a need to simplify and/or improve aspects of regulation in these areas.

7.14 Over 80 submissions were received from a range of industry and consumer representatives, including industry organisations and individual firms and practitioners. The Business Regulation Advisory Group met on 9 June 2006 to consider the submissions and provide views on the issues to the Parliamentary Secretary.

7.15 On 14 August 2006, the Parliamentary Secretary announced the intended way forward on the consultation issues, which principally included further consultation on defined proposals. Some of the more straightforward financial services regulation issues will be progressed through draft regulations, which will also be released for public consultation. The draft regulations were released for consultation on 23 March 2007.

Corporate and Financial Services Regulation Review Proposals Paper

7.16 On 16 November 2006, the Parliamentary Secretary to the Treasurer released the Corporate and Financial Services Regulation Review Proposals Paper to seek comments from stakeholders on 35 defined proposals, which take into account the comments made in submissions on the Consultation Paper.

7.17 Over 100 submissions were received in response to the paper. Overall, the reaction to the proposals was substantially positive, with many submissions expressing appreciation for the Australian Government's work to improve the effectiveness of the regulatory regime and the consultative manner in which this has been undertaken.

7.18 This Regulation Impact Statement (RIS) considers the options available to implement two significant proposals contained in the Corporate and Financial Services Regulation Review Proposals Paper in relation to the financial services regulation issues.

7.19 The financial services regulation proposals from the proposals paper to which this RIS refers are:

Proposal 1.3 Scope of financial services advice - threshold for requiring a Statement of Advice

Proposal 1.9 Product activity and data collection

7.20 In some cases, these proposals share common issues, objectives, consultation methods, implementation and review, and where possible, these themes are addressed as a whole. However, the RIS also contains an individual assessment of the problem, desired objectives, options, impact assessment and recommended option for each proposal.

7.21 The options examined in Part 4 below take into account comments from consumer and industry representatives in response to the consultation processes outlined above, as well as feedback that has been provided by these groups through informal liaison and from the regulator (ASIC) with Treasury and the Parliamentary Secretary to the Treasurer.

Problem identification

7.22 The regulation of financial services is directed at market integrity and consumer protection. The submissions received in response to the two consultations undertaken as part of the Corporate and Financial Services Regulation Review and representations with various other stakeholders have raised problems with regard to the operation of financial services regulation in practice, beyond those which were addressed as part of the Refinements to Financial Services Regulation project. In the area of financial advice, for example, these problems relate to inefficiencies caused by information asymmetry, arising in part from cost and access.

7.23 The financial services regulatory framework is founded on the principle that consumers must take responsibility for their own investment decisions and that, in order to do so, consumers must be given adequate information on which to base their decisions. However, there are some instances where the regulation of financial services inhibits the appropriate flow of information or the provision of services.

7.24 Some industry representatives have suggested that the cost of complying with some aspects of the financial services regulatory regime is too onerous such that it is not economically viable for some advisers to provide advice to clients who have a relatively small amount to invest or are only interested in a particular type of relatively simple financial product. Alternatively, some financial product issuers who are not authorised to provide personal advice are unable to provide useful information on products to clients where that advice would constitute personal advice. Both scenarios have potential to result in a reduction in accessibility and/or affordability of financial advice for consumers. This RIS examines a measure to reduce the cost and increase affordability of advice in relation to small scale investments.

7.25 Other issues with regard to the operation of financial services regulation in practice relate to the requirements of financial product issuers to report certain matters to the regulator, the Australian Securities and Investments Commission (ASIC). This RIS examines a measure to improve an aspect of reporting with regulators and improve the usefulness of that information in regulatory activities.

7.26 Section 4 provides more specific problems and analysis on the individual proposals.

Objectives

7.27 Broadly, the intention of refining financial services regulation is to ensure that the framework is operating as the policy intended it to, that is, to ensure a competitively neutral regulatory system by providing uniform regulation, reducing administrative and compliance costs, and removing unnecessary distinctions between products. In addition, the framework was intended to facilitate innovation and promote business while ensuring adequate levels of consumer protection and market integrity. [1]

7.28 The objective of reducing compliance costs for business without diminishing consumer protection is consistent with the Government's response to the recommendations by the Taskforce on Reducing the Regulatory Burden on Business to further refine the operation of the financial services regulatory framework.

7.29 The objective of refining other aspects of the financial services regulatory framework is to improve the efficiency and effectiveness with which ASIC is able to undertake its role of monitoring and enforcing financial service providers' compliance with financial services regulation requirements.

Identification of options, impact analysis, conclusions and recommendations

Impact assessment methodology

7.30 Impacts are divided between three impact groups (consumers, business and government). Typical impacts of an option on consumers might be changes in access to a market, the level of information and disclosure provided, or prices of goods or services. Typical impacts of an option on business would be the changes in the costs of compliance with a regulatory requirement. Typical impacts on government might be the costs of administering a regulatory requirement. Some impacts, such as changes in overall confidence in a market, may impact on more than one impact group.

7.31 The assessment of impacts in this draft regulation statement is based on a seven-point scale (-3 to +3). The impacts of each option are compared with the equivalent impact of the 'do nothing' option. If an impact on the impact group would, relative to doing nothing, be beneficial, the impact is allocated a positive rating of +1 to +3, depending on the magnitude of the relative benefit. On the other hand, if the impact imposes an additional cost on the impact group relative to the status quo, the impact is allocated a negative rating of -1 to -3, depending on the magnitude of the relative cost. If the impact is the same as that imposed under the current situation, a zero score would be given (although usually the impact would not be listed in such a case).

7.32 The magnitude of the rating of a particular impact associated with an option has been assigned taking into account the overall potential impact on the impact group. The reference point is always the status quo (or 'do nothing' option). Whether the cost or benefit is one-off or recurring, and whether it would fall on a small or large proportion of the impact group (in the case of business and consumers), is factored into the rating. For example, a cost or benefit, even though large for the persons concerned, may not result in the maximum rating (+/-3) if it is a one-off event that only falls on a few individuals. Conversely, a small increase in costs or benefits might be given a moderate or high rating if it would be likely to recur or if it falls on a large proportion of the impact group. The rating scale for individual impacts is explained in the table below.

Rating an individual impact
+3 +2 +1 0 -1 -2 -3
Large benefit/ advantage compared to 'do nothing' Moderate benefit/ advantage compared to 'do nothing' Small benefit/ advantage compared to 'do nothing' No substantial change from 'do nothing' Small cost/ disadvantage compared to 'do nothing' Moderate cost/ disadvantage compared to 'do nothing' Large cost/ disadvantage compared to 'do nothing'

7.1 The ratings for the individual impacts compared to the status quo are then tallied to produce an overall outcome for the option. If it is positive, it indicates that the option is likely to produce a more favourable cost/benefit ratio than the status quo. If it is zero there would be no overall benefit from adopting the option, and if negative the option would provide overall a less favourable cost/benefit ratio than the 'do nothing' option. Ordinarily, options that have the highest positive score would be the favoured courses of action.

7.2 What is classed as a 'large', 'moderate' or 'small' cost or benefit depends on the nature of the problem and options being considered. Of course, the costs and benefits associated with options to address a problem costing billions of dollars per year are likely to be of a much greater absolute magnitude than the costs and benefits of options for deALIGN with a rather modest issue that affects only a handful of persons. However, as all the ratings are made relative to the status quo/ do nothing option for a particular problem, the absolute value of 'large' or 'moderate' or 'small' is not really important. All that matters is that within a problem assessment, the impacts of each option are given appropriate ratings relative to the status quo and each other. If that occurs, it will be sufficient for the methodology to yield an overall rating that assists in assessing the relative merits of options, from a cost/benefit perspective, to address the particular problem.

7.3 An example of the rating calculation for an option, using the seven-point scale ratings of impacts, is in the table below. The example is based on a purely hypothetical scenario that a new type of long-wearing vehicle tyre is being sold and marketed, but it has become apparent that the new tyres have a higher risk of exploding while in motion than conventional tyres. The example is designed merely to illustrate how the rating scale might be used to compare a proposal's costs and benefits option to the 'do nothing' option - it is not intended to be a comprehensive or realistic assessment of options to address such a problem.

Illustrative rating for the problem of a long-wearing tyre that may fail

Option A: Do nothing

Benefits Costs
Consumers Access to a cheaper solution for vehicle tyres Risk of tyre failure that can result in personal and property damage as a result of collision. Damage can be severe but cases are rare.
Industry Some compensation payments to persons as a result of collisions caused by the tyre
Government Advantages from a waste management perspective

Option B: Ban on sale of the new tyre

Benefits Costs
Consumers No persons will not be affected by tyre failure and resultant damage (+3) Lack of access by all consumers to long-wearing vehicle tyres, increasing the cost of vehicle maintenance (-2)
Industry No compensation payments for accident victims (+1) Transitional costs involved with switching back all manufacturing/marketing operations to conventional tyres (-3)
Government Conventional tyres produce more waste which is costly to deal with (-1)
Sub-rating +4 -6
Overall rating -2

Option C: Industry-developed quality control standards

Benefits Costs
Consumers Much lower risk of tyre failure and resultant damage than status quo (+2)
Industry Significantly less compensation payments for accident victims (+1) Developing and monitoring industry-wide quality control standards (-2)
Government
Sub-rating +3 -2
Overall rating +1

7.1 In the above hypothetical example, Option C appears to have a better impact for consumers and a better overall cost/benefit rating than Option B. Although Option B appears to offer a slightly better impact for consumers, it appears to be less effective from an overall cost/benefit perspective than Option C.

Identification of problems, options, impact analysis, conclusions and recommendations in relation to the Statement of Advice threshold (Proposal 1.3)

Problem

Situation

7.2 The definition of personal advice captures situations where a financial service provider uses personal information and product information to make a recommendation to a retail client. The personal advice definition is triggered if a financial service provider knows a client's objectives, financial situation or needs and considers that information in recommending or selling a product. In these circumstances, a Statement of Advice (SOA) is required to be provided to the client.

7.3 An SOA is provided by a financial adviser when they provide personal advice to a client. The SOA sets out:

·
the advice they have given;
·
the information on which it is based;
·
how the adviser is paid (including commissions); and
·
any interests, associations or relationships that could influence them.

Problem

7.4 There is evidence that the cost of producing an SOA is not economic for an adviser where a client is seeking a minor piece of advice and/or has a relatively small amount of money to invest. Many advisers are choosing not to provide personal advice to such clients, with the result that in these circumstances small scale consumers may not be able to access advice that may benefit them.

7.5 Some industry participants have submitted that in some cases, the cost of producing an SOA is not economical for an adviser where a client is seeking a minor piece of advice and/or has a relatively small amount of money to invest. Many advisers are choosing not to provide personal advice to such clients, with the result that often they cannot access advice that may benefit them.

7.6 For instance, industry has indicated that the cost of preparing an SOA is approximately $260 [2] on average. For a financial planner to at least recover this cost when providing personal advice to clients, they would need to either charge the client a fee of $260, or receive a commission of $260 from the sale of a financial product as a result of the financial advice provided. If a financial adviser decides to charge an up-front fee for providing advice, it is likely that a $260 fee would inhibit many smaller-scale investors from seeking such advice.

7.7 Alternatively, if a financial adviser used a commission-based structure for remuneration, in order to break even, they would need to receive a commission of $260. Given that financial adviser commission rates generally range from one to two per cent. Based on a commission of one per cent of the amount invested, the cost of preparing the SOA would be recovered if the investment amount to which the advice related was $26,000. Based on a commission of two per cent of the amount invested, the cost of preparing the SOA would be recovered if the investment amount to which the advice related was $13,000.

7.8 Therefore, it is unlikely that a financial adviser that receives remuneration through a commission payment structure would be willing to provide financial advice to small scale investors where they are unable to recover the cost of providing the SOA.

Objective

7.9 The policy objective is to encourage the provision of financial advice by advisers and facilitate access to advice for consumers, while maintaining important consumer protections, such as ensuring that advice is appropriate and documented and that documentation is accessible.

7.10 Appropriate reduction of the costs of providing advice may encourage the provision of small scale advice by advisers and improve access to advice for consumers currently excluded from the advice market.

Options

Option A: No action

7.11 Maintain the existing requirements to provide an SOA in all situations where personal advice is provided (except where exemptions apply).

Option B: Subjective proportionate threshold for the provision of a Statement of Advice

7.12 Introduce a threshold which determines when an SOA is required to be provided that is proportionate to the client's gross annual income. A threshold of 10 per cent could be introduced, whereby an adviser would not need to provide the client with an SOA if the investment amount to which the advice related was lower than 10 per cent of the client's gross annual income. Information on a client's income would generally be obtained through consultations with the client regarding their financial situation. For advice relating to amounts less than 10 per cent of a client's gross annual income, an adviser would be required to keep a Record of Advice (ROA).

7.13 For example, an investor with an average annual income of $42,000 [3] , an SOA would need to be prepared and provided to a client for an investment amount greater than $4,200.

7.14 In contrast to an SOA, an ROA allows advisers to document further advice to clients with brevity. Prior to the introduction of an ROA, all advice was required to be documented in an SOA. The ROA sets out the advice given to the client or brief particulars of the recommendations made to the client including the basis on which the recommendations were made. It also has to contain information about the consequences of partially or wholly replacing one financial product with another, where such advice is provided.

7.15 An ROA is currently used in the circumstance where initial advice has been provided by the adviser in an SOA and where the client's relevant personal circumstances have not changed significantly since the giving of the prior advice. In these circumstances, an ROA is provided to the client upon their request, not as a matter of course. This option proposes allowing an ROA to be provided for initial advice (where the threshold is met) and requiring it to be provided to the client.

Option C: Objective dollar threshold for the provision of a Statement of Advice

7.16 Introduce a threshold into the SOA requirements, such that a full SOA would only be required if the advice given is in relation to an investment amount that is above a certain monetary threshold. For simplicity, a threshold of $15,000 is proposed which relates to a level that should make the threshold commercially useful without inappropriately undermining consumer protection. This would mean that an SOA would be required to be prepared and provided to a client if the amount to which the advice relates is $15,000 or more. For advice relating to amounts less than $15,000, it is proposed to require the adviser to provide an ROA to the client. The threshold will be reviewable as appropriate.

7.17 Given that superannuation holdings generally involve a significant accumulated investment or potential accumulated investment, and advice in relation to superannuation can have a potentially significant impact on consumers' financial situation, it is proposed to limit the application of this option in relation to superannuation, to the following circumstances. Where that advice is to consolidate or supplement superannuation into an existing fund the SOA exemption may be relied on. Where this occurs, the ROA must contain the section 947D disclosure requirements contained in the Corporations Act. These disclosures relate primarily to charges and pecuniary interests relevant to the client. Where the advice relates to the consolidation or supplementation of superannuation in relation to an investment amount of $15,000, the proposal will extend to the consideration of the life risk insurance where it is packaged with the superannuation interest in order to reasonably make recommendations regarding superannuation taking into consideration all the features of the relevant superannuation products.

7.18 The existing SOA arrangements that apply to general insurance products (including in relation to sickness and accident and consumer credit insurance) would not be altered by this proposal. General insurance products (other than sickness and accident and consumer credit insurance) have previously been granted an exemption from the provision of an SOA..

7.19 It is not proposed that the threshold apply to advice in relation to life risk insurance products (other than as discussed above) and derivatives for reasons including the following:

·
The difficulty in determining how a threshold would appropriately be applied to these products. For example, if the threshold was to be applied to the premium, it is likely that the threshold would always apply, and if the threshold was to apply to the amount insured, it is not likely that the SOA exemption would be able to be used as the amount would always be above the threshold.
·
There is potential for advice in relation to these products to have a significant impact on a consumer's overall investment and/or risk coverage.
·
The complexity of these products which often means that they are not easily or commonly understood.

7.20 The proposal would not alter the need for the advice to be appropriate or for the adviser to be appropriately trained to provide personal advice.

Impact analysis

Impact group identification

7.21 Groups that will be affected by the proposed amendments are:

·
financial service providers involved in the provision of personal advice;
·
consumers of personal advice; and
·
government and regulators.

Assessment of costs and benefits

Option A: No action

Benefits Costs
Consumers Consumers would receive a full SOA for advice, where they are able to access advice, which may reduce the potential for consumers to make inappropriate investment decisions. The ability for small-scale investors to access and afford financial advice would be limited because advisers would continue to be reluctant to provide advice where it is not economical to do so.
Industry Where advisers provide advice in relation to relatively small investments, they would continue to bear the relatively high costs of providing personal advice to clients with limited ability to recover costs.
Government ASIC would be able to access documented SOAs provided to clients to monitor compliance with the law.

Option B: Subjective proportionate threshold for the provision of a Statement of Advice

Benefits Costs
Consumers Increased access to advice for consumers where advisers are more willing to provide advice because it is economically viable as a result of reduced costs. [3]

In many situations where advice is provided to small-scale investors that are average income earners, it would still not be economical for an adviser to prepare an SOA for a client. Therefore, consumers would still not be able to access advice in some situations.

In the example of an average income of $42,000, an adviser would be required to provide an SOA for advice in relation to an investment amount of $4,200. Based on a commission of two per cent, the adviser would only be able to recover $84, despite incurring a cost of approximately $260 for preparing the SOA. [-3]

A reduction in the disclosure that is provided to consumers in an SOA where the investment amount is less than 10 per cent of the client's gross annual income.

Without documented advice, there is a risk that consumers could make inappropriate investment decisions. However, an ROA would need to be kept by the adviser, which the client would be able to request if they wished. [-2]

Industry While this proposal would not reduce all costs associated with providing advice, it would reduce some costs of providing advice to smaller-scale investors. A lengthy SOA would be costly for advisers to produce relative to the investment amount in many cases. This option would reduce this cost. [2] There would be added complexity for advisers, and less certainty for consumers, in regard to determining whether an SOA is required to be provided. [-2]
Costs for the adviser associated with preparing a Record of Advice. [-1]
Government While ASIC would not be able to access documented SOAs provided to clients to monitor compliance with the law, it would be able to monitor Records of Advice. [2] The full extent of the SOA would not be available for assessment and enforcement by ASIC. Compliance by ASIC will be based on monitoring of ROAs. [-1]
Sub-rating 7 -9
Overall rating -2

Option C: Objective dollar threshold for the provision of a Statement of Advice

Benefits Costs
Consumers Increased access to advice for consumers where advisers are more willing to provide advice to small-scale investors (that is, for advice in relation to investment amounts less than $15,000) because it is economically viable as a result of reduced costs. [3] A reduction in the disclosure that is provided to consumers in an SOA where the investment amount is less than $15,000. Without documented advice, there is a risk that consumers could make inappropriate investment decisions. However, a Record of Advice would need to be kept by the adviser and provided to the client. Further, additional disclosures will be required for advice in relation to superannuation. [-2]
Industry While this proposal would not reduce all costs associated with providing advice, it would go a significant way towards reducing the costs of providing advice to small-scale investors. A lengthy SOA would be costly for advisers to produce relative to the investment amount in many cases. This option would reduce this cost. [2] Costs for the adviser associated with preparing a Record of Advice and the additional disclosures for superannuation. [-1]
From a compliance perspective, the threshold would be a relatively simple indication for advisers to determine whether a SOA is required to be provided. [2]
Government While ASIC would not be able to access documented SOAs provided to clients to monitor compliance with the law, it would be able to monitor Records of Advice. [3] The full extent of the SOA would not be available for assessment and enforcement by ASIC. Compliance by ASIC will be based on monitoring of ROAs. [-1]
Sub-rating 10 -4
Overall rating 6

Business Cost Calculator

7.1 This section presents the results of the analysis of the cost impact on business of the various options.

7.2 All options assumed the following: 3000 businesses were affected by this proposal based on the number of licensees authorised to give personal advice; approximately 720,000 SOAs are produced per annum; the cost of producing an SOA is $260 (as stated earlier) and approximately 5 per cent of those SOAs are provided for advice in relation to investments of less than $15,000. Further it was assumed that the variable costs in relation to this proposal related to the documentation time of an SOA or an ROA, and that the research and preparatory times were fixed. On this basis, it was assumed that the documentation time (and therefore cost) for producing an ROA was approximately half that of an SOA.

7.3 The analysis results in the following costs for each option:

Option Cost per business Total cost
Option A $3,120 $9,360,000
Option B $2,470 $7,410,000
Option C $2,275 $6,825,000

7.1 Against the benchmark of the current regulatory requirement (Option A) to provide an SOA in all circumstances where personal advice is provided, Options B and C both reduced the cost of disclosure for the provision of advice in relation to the population group (that is, advice in relation to investments of less than $15,000). The industry wide cost of Option B is slightly greater than that of Option C due in part to the complexity of determining the threshold under this Option B. In addition, Option B would open up the provision of high value advice without SOA documentation where the client has higher gross annual income. In conclusion, Option C resulted in the greatest cost saving, is less complex to administer and provides consumer safeguards in relation to the cap of the value of advice documented by an ROA and the limitations in relation to superannuation advice.

Consultation

Summary of comments

7.2 Submissions to the Corporate and Financial Services Regulation Review Proposals Paper outlined the following views of the proposal.

7.3 Industry was generally in support of the proposal in principle and the aims it was seeking to achieve. A general dollar threshold was considered a sound approach as it was easy to apply in all situations and provided meaningful relief to advisers and therefore would contribute significantly to expanding access to robust financial advice.

7.4 Some submissions considered that it is often the clients holding smaller account balances who require the protection offered by an SOA. However, currently it is these clients who are unable to access advice at all, either because an adviser does not consider it worthwhile to provide advice, or because the client is unable to afford the fee charged by the adviser.

7.5 Some submissions noted that a threshold would enable advisers to provide personal advice to clients on a more commercially-viable basis. There were variations in what was considered to be an appropriate threshold. Industry considered the level of the threshold to be too low (when set at $10,000) and as such not broadly applicable or valuable, therefore $15,000 was considered a reasonable threshold.

7.6 Further comments on the proposal were:

·
The exclusion of superannuation and life risk insurance from the threshold was considered to skew advice away from superannuation, create operational difficulties in managing super and non-super clients; and exacerbate the perceived underinsurance of Australian lives;
·
The application of the threshold to future or regular contributions without a sunset period would mean the threshold would rarely apply, as most investments to which future or regular contributions were made would at some point reach the threshold;
·
The ongoing relevance of the threshold if it were not appropriately indexed;
·
The appropriateness of still requiring the ROA as a disclosure option, given it still imposes burden on the planner and therefore should be modified;
·
The value of the proposal is limited if it is applied only to initial investments, given the minimum investment requirements attached to most products. The proposed threshold should apply irrespective of an existing balance the client might have.

7.7 Consumer groups argued that there was insufficient evidence to suggest that the proposal will in fact expand the availability of personal advice. As discussed above however, it is currently these clients who are unable to access advice at all, and industry has indicated that they supportive of the option which should lead to be an increase in the provision of small scale investment advice.

7.8 In addition, consumer groups argued that there lacked evidence to suggest that advice will be of sufficient quality to assist the consumer and that it will not be conflicted advice associated with a product recommendation. They considered that consumers with relatively small amounts to invest are most vulnerable, lack investment experience and financial literacy, and will not be given an adequate level of disclosure.

7.9 They were concerned that investment products will be sold as a series of parcels in order to avoid the SOA. It is proposed to apply a sunset clause to the value of the advice so that where the advice commits the client to regular or future investments, the threshold will relate to the value that the initial investment and the future amounts anticipated to be reached in the next 12 months. Further, it is proposed to introduce an anti-avoidance mechanism aimed at ensuring it is not possible to carve up an investment amount into parcels less than $15,000 in order to be providing advice on an investment less than $15,000 and therefore avoid the requirement to produce an SOA. This mechanism will take the form of an anti-avoidance provision that will provide for civil or criminal action for a breach of s 946A (the requirement to give a Statement of Advice) of the Corporations Act.

7.10 Further, consumer groups raised concerns that the removal of the SOA for investments allowed for advice to be provided without adequate consumer protection. They argue that a ROA is not sufficient to provide ASIC with the ability to examine the appropriateness of that advice. It was considered to limit the ability of internal and external dispute resolution schemes to review and resolve problems between the consumer and licensee.

7.11 The option includes a number of safeguards designed to address these concerns to the extent possible such as the requirement to provide the ROA to the client rather than upon their request. The ROA is then available for dispute resolution purposes.

7.12 While more supportive of the proposal, the superannuation industry groups supported the consumer views that superannuation should be excluded from the threshold. However, the exclusion of superannuation would to some extent create unintended outcomes such as advice skewed away from superannuation and additional cost to business in establishing dual mechanisms for superannuation and non-superannuation activities.

Conclusion and recommended option

7.13 The problem to be addressed is that consumers that wish to obtain financial advice in relation to a relatively small investment amount are unable to access or afford financial advice due to the relatively high costs of advice.

7.14 Option A is not preferred as it would not reduce the costs associated with preparing SOAs for advice in relation to relatively small investment amounts.

7.15 Options B and C would reduce the costs associated with preparing SOAs in relation to advice on relatively small investment amounts while still ensuring that records of advice are kept.

7.16 Consultations have highlighted the difficulty in determining what might be an appropriate threshold above which an SOA would be required. Consideration was given to the relative significance of an investment amount and the relative simplicity of complying with a threshold. Option B would apply a scale of significance relative to annual income, which may not be an appropriate measure for at least two reasons. Firstly, this may not improve access to advice for lower income earners as an SOA would be required to be prepared well below the adviser's break-even point of recovering the cost of preparing the SOA. Secondly, high income earners would not receive an SOA if the investment amount was less than 10 per cent of their wage, even if the amount would generally be considered to be substantial. For example, a client with an annual income of $200,000 would not receive an SOA for advice in relation to an investment amount of $19,000, even though this amount might be considered to be substantial and it is likely that the adviser would be able to at least recover the cost of preparing the SOA through remuneration.

7.17 Option B would also introduce a movable and subjective threshold that would be difficult for the adviser and consumer to determine, and would be difficult for the regulator to monitor compliance.

7.18 While Option C creates a threshold of what is considered to be 'significant', it is linked to the point at which it becomes commercially viable for an adviser provide advice, based on recovering the cost of preparing an SOA. An objective threshold test would also be relatively simple to comply with and administer.

7.19 Option C is the preferred option as it would reduce the costs for advisers in providing advice for relatively small-scale investors and as a consequence, would increase consumers' access to affordable financial advice. Consumer protection would be maintained through the requirement to provide an SOA for advice above the threshold and the requirement to provide a Record of Advice below the threshold.

Product activity and data collection (Proposal 1.9)

Problem

Situation

7.20 A Product Disclosure Statement (PDS) contains key information regarding a financial product offered to investors. For most classes of financial product, section 1015D of the Corporations Act requires the product issuer to lodge an 'in use' notice with ASIC within five business days of the first use of the PDS. The requirement ensures ASIC is aware of all products being promoted in the market.

Problem

7.21 Currently notices are provided to ASIC in hardcopy on a downloadable form (FS53) from the ASIC website. ASIC received approximately 12,000 such notices in 2005. Some submissions calculated the cost to industry of lodging in-use notices. With approximately 12,000 notices issued in 2004 each attracting a $33 lodgment fee, this equates to $396 000 for lodgment alone. While there is a relatively small cost for lodging an 'in-use' notice with ASIC, for large businesses when multiplied across the wide range of PDSs prepared by banks and the competitive positioning of interest rates, the cost of lodging fresh 'in-use' notices with ASIC can be significant.

7.22 Once received by ASIC, the notice has limited regulatory use because the data does not provide any means for informing ASIC when a PDS is out of date and/or when a product is withdrawn from the market other than receipt of a new notice which assumes it replaces the prior notice.

7.23 Business considers the preparation of the in-use notice to be time-consuming and repetitive as often the change is simply a new date of issue or new fee information. All questions, such as those relating to the complaints mechanism, contact person and so forth, must still be completed each time a form is lodged even when there has been no change. The current mechanism is not sufficiently flexible to address a range of varying circumstances as it is a one-size-fits-all document with many items relevant only to superannuation.

7.24 Further, where the change is one relating to a change in broader circumstances such as an interest rate change, a change in the monetary amount of an already applicable fee or government tax or, in the case of pensioner deeming accounts, a change in the deeming interest rate (which can be made at any time by the responsible Minister), business is required to revise its PDSs and lodge a new 'in-use' notice to reflect these changes for circumstances beyond their control using a mechanism that they consider is time consuming, inefficient and potentially costly.

Objective

The policy objectives are to:

·
ensure ASIC is aware of all product information that it requires to be useful;
·
minimise cost to business in providing the information; and
·
enhance protection of consumers by ensuring ASIC has regulatory oversight of all financial products able to be sold to investors.

Options

Option A: No action

7.25 Continue with the current arrangements whereby hard copy in-use notices are provided to ASIC.

Option B: Remove all legislative requirements to report Product Disclosure Statements to ASIC

7.26 Option B proposes the abolition of the requirement to notify ASIC of new Product Disclosure Statements.

Option C: Introduce on-line reporting of Product Disclosure Statements to ASIC

7.27 Option C proposes an on-line reporting mechanism for product issuers to advise ASIC of matters relating to PDS distribution. This mechanism will create efficiencies for business in their lodgement of the required information and for ASIC in their administration of that information.

7.28 It proposes continuation of payment of a lodgment fee when the first in use notice is lodged only. All subsequent changes to that notification will not be charged.

7.29 The report will be required to be lodged when:

·
A Statement (as defined for section 1015D(2)) is first given to someone in a recommendation, issue or sale situation.
·
A Statement is no longer given in a recommendation, issue or sale situation.
·
Changes are made to the fees and charges contained in the enhanced fee disclosure table that must be provided in a Statement. The enhanced fee disclosure table provides a standard approach for superannuation and managed investment products to disclose fees to consumers and enable consumers to more effectively make comparisons between products.

7.30 The enhanced fee disclosure table was introduced as part of Superannuation Choice on 1 July 2005. The table standardises the description and calculation methods for fees and costs to allow for comparability and understanding of this information in Product Disclosure Statements.

7.31 Amongst other things, the table requires Product Disclosure Statements for superannuation and managed investment products to include the following components:

·
A 'Consumer Advisory Warning Box' which alerts consumers to the importance of value for money and the compounding value of fees and costs and their impact over time on end benefits;
·
A 'Fees and Costs' template which is a standardised fee table that simplifies the disclosure of fees and costs and allow for more effective comparison across products;
·
An 'Additional Explanation of Fees and Costs' section which will include additional important information about fees and costs; and
·
An 'Example of Annual Fees and Costs' which will provides an illustrative worked example of fees and costs in a balanced investment option for a specified account balance and level of contributions.

Impact analysis

Impact group identification

7.32 Groups that will be affected by the proposed amendments are:

·
consumers
·
financial product issuers; and
·
government and regulators.

Assessment of costs and benefits

Option A: No action

Benefits Costs
Consumers
Industry Businesses would continue to incur costs to provide cumbersome and inadequate information.
Government ASIC would continue to receive in-use notices (and associated lodgment fees) from financial product issuers. Out of date information provided to ASIC, which could potentially hinder its regulatory performance.

Option B: Remove all legislative requirements to report Product Disclosure Statements to ASIC

Benefits Costs
Consumers Potential for misleading PDSs, which are not difficult for ASIC to detect. There is a risk that consumers would be misled and may lose their investments in defective products. Investor protection would be reduced as ASIC would not be aware of current financial products in the market. [-3]
Industry No cost to business in submitting the in-use notice. [2]
Government No administrative cost to ASIC of receiving in-use notices. [1] No revenue receipt for ASIC from lodgement fee [-1]
Sub-rating 3 -4
Overall rating -1

Option C: Introduce on-line reporting of Product Disclosure Statements to ASIC

Benefits Costs
Consumers Increased consumer protection arising from ASIC's ability to monitor and act upon the information provided in in-use notices regarding PDSs. [3]
Industry Reduced compliance cost for business. [2] Cost to business and ASIC of provision of dual system (paper and on-line) during the transition period to on-line only. [-1]
Government Provision of useful, timely information to ASIC for regulatory purposes. [3] Cost to ASIC in development of on-line notification system. [-2]
Continued collection of lodgement fee. [0]
Once in place, reduced resourcing requirements for ASIC administration of in-use notices. [1]
Sub-rating 9 -3
Overall rating +6

Business Cost Calculator

7.1 This section presents the results of the analysis of the cost impact on business of the various options.

7.2 For all options, it was assumed that all businesses licensed by ASIC with the authorisation to issue financial products do so. It was assumed that the number of in use notices currently received by ASIC per annum represented the number of new products and changes notified to ASIC and that a small percentage of these would be withdrawn or amended each year. Assumptions were made regarding the length of time required to complete and submit the required form and hourly administration costs to business.

7.3 The analysis results in the following costs for each option:

Option Cost per business Total cost
Option A $1,500 $3,600,000
Option B $0 $0
Option C $1,200 $2,880,000

7.1 Option B proposes that all legislative requirements to report PDSs to ASIC be abolished. While this creates the lowest cost outcome, it is considered that abolishing all reporting to ASIC imposes unnecessary risk due to the limitations of information that would be available to ASIC. Option C will reduce the cost to business of providing in use notice information to ASIC through the provision of a more efficient mechanism than is currently available. It is noted that there will be initial cost to the Government in this option of establishing the on line mechanism.

Consultation

7.2 Submissions received in response to the Corporate and Financial Services Regulation Review Proposals Paper were strongly in favour of enabling electronic lodgement of in-use notices. In addition to requiring electronic lodgement of in-use notices, the proposal expands the triggers for requiring notification of information in in-use notices to ASIC. Industry was concerned that the additional triggers may impose further red tape and cost on their operations.

7.3 The additional triggers proposed were: change of contact details previously reported; withdrawal of a financial product; and change to fees and charges set out in the fee disclosure table.

7.4 ASIC has advised that the critical information for regulatory purposes is notification of:

·
the date a new PDS takes effect (that is, the date it becomes in-use);
·
the date a PDS is no longer on offer (that is, the date it becomes out of use) (industry is arguing that this can be difficult to determine particularly in relation to life risk insurance); and
·
changes to fees and charges set out in the enhanced fee disclosure table.

7.5 If the proposal to enable electronic lodgement of in-use notices proceeds, industry is keen to ensure that the solution:

·
is tailored to take into account the category of financial product selected so that only those items relevant to the product are required to be completed (rather than the current paper notice that requires completion of the whole form each time); and
·
provides adequate security and access controls over the portal.

7.6 These are both matters of implementation that ASIC would take into consideration when developing the electronic solution. In addition, industry would like the proposal to:

·
reconsider the five day reporting requirement from the date the product is first recommended and instead requires reporting from the date the PDS is prepared; and
·
address the payment of lodgement fees and apply an appropriate fee structure given there are a greater number of circumstances that will trigger lodgement.

7.7 Reporting periods were considered appropriate and not subject to change. It was considered appropriate to apply fees when the first in use notice is lodged only. All subsequent changes to that notification will not be charged.

Conclusion and recommended option

7.8 The problem relates to the costs associated with lodging PDS in-use notices, compared with the regulatory benefit from ASIC receiving such notices.

7.9 Option A reflects the current regulatory arrangements which do not address the current problem that ASIC has in being unable to efficiently monitor the market for financial products and determine when a product is no longer in use, which results in a growing database of PDSs that have been lodged with ASIC irrespective of whether the product is still available in the market. It is against this backdrop that the other options were considered.

7.10 Option B would reduce the cost to both industry and the regulator in terms of lodging PDS in-use notices and administering a notice system, but would remove the ability for the regulator to monitor the market for financial products.

7.11 Option C is the preferred option as it would improve the regulatory usefulness and efficiency of the PDS in-use notice system and would reduce compliance burdens on business.

Implementation and review

7.12 The recommended actions all require legislative amendments to the Corporations Act.

7.13 ASIC, in its role as regulator, will provide guidance to licensees to assist them in meeting these requirements. ASIC, through its role in monitoring compliance and approving alternative arrangements, will monitor the effectiveness of implementation and will advise on any practical difficulties on an ongoing basis. Through this monitoring role, the Government will be kept informed on any problems the proposed regulation may cause in meeting its objectives or in possibly having unintended consequences.

7.14 A review of the regulations will be undertaken as part of the Government's ongoing review processes.


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