Financial Services Reform Act 2001 (122 of 2001)

Schedule 1   Financial Services and Markets

Part 2   Consequential amendments

Australian Securities and Investments Commission Act 2001

20   After section 12BA

Insert:

12BAA Definition of financial product

General definition of financial product

(1) Subject to subsection (8), for the purposes of this Division, a financial product is a facility through which, or through the acquisition of which, a person does one or more of the following:

(a) makes a financial investment (see subsection (4));

(b) manages financial risk (see subsection (5));

(c) makes non-cash payments (see subsection (6)).

(2) Subject to subsection (8), for the purposes of this Division, a particular facility that is of a kind through which people commonly make financial investments, manage financial risks or make non-cash payments is a financial product even if that facility is acquired by a particular person for some other purpose.

(3) A facility does not cease to be a financial product merely because:

(a) the facility has been acquired by a person other than the person to whom it was originally issued; and

(b) that person, in acquiring the product, was not making a financial investment or managing a financial risk.

Meaning of makes a financial investment

(4) For the purposes of this section, a person (the investor) makes a financial investment if:

(a) the investor gives money or money’s worth (the contribution ) to another person and any of the following apply:

(i) the other person uses the contribution to generate a financial return, or other benefit, for the investor;

(ii) the investor intends that the other person will use the contribution to generate a financial return, or other benefit, for the investor (even if no return or benefit is in fact generated);

(iii) the other person intends that the contribution will be used to generate a financial return, or other benefit, for the investor; and

(b) the investor has no day-to-day control over the use of the contribution to generate the return or benefit.

Note 1: Examples of actions that constitute making a financial investment under this subsection are:

(a) a person paying money to a company for the issue to the person of sharesin the company (the company uses the money to generate dividends for the person and the person, as a shareholder, does not have control over the day-to-day affairs of the company); or

(b) a person contributing money to acquire interests in a registered scheme from the responsible entity of the scheme (the scheme uses the money to generate financial or other benefits for the person and the person, as a member of the scheme, does not have day-to-day control over the operation of the scheme).

Note 2: Examples of actions that do not constitute making a financial investment under this subsection are:

(a) a person purchasing real property or bullion (while the property or bullion may generate a return for the person, it is not a return generated by the use of the purchase money by another person); or

(b) a person giving money to a financial services licenseewho is to use it to purchase shares for the person (while the purchase of the shares will be a financial investment made by the person, the mere act of giving the money to the licensee will not of itself constitute making a financial investment).

Meaning of manages a financial risk

(5) For the purposes of this section, a person manages financial risk if they:

(a) manage the financial consequences to them of particular circumstances happening; or

(b) avoid or limit the financial consequences of fluctuations in, or in the value of, receipts or costs (including prices and interest rates).

Note 1: Examples of actions that constitute managing a financial risk are:

(a) taking out insurance; or

(b) hedging a liability by acquiring a futures contract or entering into a currency swap.

Note 2: An example of an action that does not constitute managing a financial risk is employing a security firm (while that is a way of managing the risk that thefts will happen, it is not a way of managing the financial consequences if thefts do occur).

Meaning of makes non-cash payments

(6) For the purposes of this section, a person makes non-cash payments if they make payments, or cause payments to be made, otherwise than by the physical delivery of Australian currency in the form of notes and/or coins.

Note: Examples of actions that constitute making non-cash payments are:

(a) making payments by means of a facility for direct debit of a deposit account; or

(b) making payments by means of a facility for the use of cheques; or

(c) making payments by means ofa purchased payment facility within the meaning of thePayment Systems (Regulation) Act 1998, such as a smart card; or

(d) making payments by means of traveller’s cheques in Australian currency.

Specific things that are financial products (subject to subsection (8))

(7) Subject to subsection (8), the following are financial products for the purposes of this Division:

(a) a security;

(b) any of the following in relation to a managed investment scheme:

(i) an interest in the scheme;

(ii) a legal or equitable right or interest in an interest covered by subparagraph (i);

(iii) an option to acquire, by way of issue, an interest or right covered by subparagraph (i) or (ii);

(c) a derivative;

(d) a contract of insurance (see subsection (9)) (except health insurance provided as part of a health insurance business as defined by subsection 67(4) of theNational Health Act 1953);

(e) a life policy, or a sinking fund policy, within the meaning of theLife Insurance Act 1995, that is not a contract of insurance (see subsection (9));

(f) a beneficial interest in a superannuation fund (as defined by section 10 of theSuperannuation Industry (Supervision) Act 1993);

(g) an RSA (retirement savings account) within the meaning of theRetirement Savings Accounts Act 1997;

(h) any deposit-taking facility made available by an ADI (within the meaning of theBanking Act 1959)in the course of its banking business (within the meaning of that Act), other than an RSA (RSAs are covered by paragraph (g));

(i) a debenture, stock or bond issued or proposed to be issued by a government;

(j) a foreign exchange contract;

(k) a credit facility (within the meaning of the regulations);

(m) anything declared by the regulations to be a financial product for the purposes of this subsection.

Note: Even though something is expressly excluded from one of these paragraphs, it may still be a financial product (subject to subsection (8)) either because:

(a) it is covered by another of these paragraphs; or

(b) it is covered by the general definition in subsection (1).

Specific things that are not financial products

(8) Despite anything else in this section, the following are not financial products for the purposes of this Division:

(a) an excluded security;

(b) health insurance provided as part of a health insurance business (as defined in subsection 67(4) of theNational Health Act 1953);

(c) State insurance or Northern Territory insurance, including insurance entered into by:

(i) a State or the Northern Territory; and

(ii) some other insurer;

as joint insurers;

(d) a facility:

(i) that is an approved RTGS system for the purposes of thePayment Systems and Netting Act 1998; or

(ii) for the transmission and reconciliation of non-cash payments (see subsection (6)), and the establishment of final positions, for settlement through an approved RTGS system within the meaning of thePayment Systems and Netting Act 1998;

(e) a facility that is a designated payment system for the purposes of thePayment Systems (Regulation) Act 1998;

(f) a facility for the exchange and settlement of non-cash payments (see subsection (6)) between providers of non-cash payment facilities;

(g) a facility that is:

(i) a financial market; or

(ii) a clearing and settlement facility; or

(iii) a payment system operated as part of a clearing and settlement facility;

(h) so much of an arrangement as is not a derivative within the meaning of the Corporations Act because of paragraph 761D(3)(a) of that Act;

(i) an arrangement that is not a derivative within the meaning of the Corporations Act because of paragraph 761D(3)(b) of that Act;

(j) an arrangement that is not a derivative within the meaning of the Corporations Act because of subsection 761D(4) of that Act;

(k) any of the following:

(i) an interest in something that is not a managed investment scheme within the meaning of the Corporations Act because of paragraph (c), (e), (f), (k), (l) or (m) of the definition of managed investment scheme in section 9 of that Act;

(ii) a legal or equitable right or interest in an interest covered by subparagraph (i);

(iii) an option to acquire, by way of issue, an interest or right covered by subparagraph (i);

(m) a deposit-taking facility that is used for State banking;

(n) equipment or infrastructure by which something else that is a financial product is provided;

(o) a funeral benefit;

(p) a facility, interest or other thing declared by regulations made for the purposes of this subsection not to be a financial product.

(9) For the purpose of paragraphs (7)(d) and (e), contract of insurance includes:

(a) a contract that would ordinarily be regarded as a contract of insurance even if some of its provisions are not by way of insurance; and

(b) a contract that includes provisions of insurance in so far as those provisions are concerned, even if the contract would not ordinarily be regarded as a contract of insurance.

12BAB Meaning of financial service

When does a person provide a financial service ?

(1) For the purposes of this Division, subject to paragraph (2)(b), a person provides a financial service if they:

(a) provide financial product advice (see subsection (5)); or

(b) deal in a financial product (see subsection (7)); or

(c) make a market for a financial product (see subsection (11)); or

(d) operate a registered scheme; or

(e) provide a custodial or depository service (see subsection (12)); or

(f) operate a financial market (see subsection (15)) or clearing and settlement facility (see subsection (17)); or

(g) provide a service that is otherwise supplied in relation to a financial product; or

(h) engage in conduct of a kind prescribed in regulations made for the purposes of this paragraph.

(2) The regulations may set out:

(a) the circumstances in which persons facilitating the provision of a financial service (for example, by publishing information) are taken also to provide that service; or

(b) the circumstances in which persons are taken to provide, or are taken not to provide, a financial service.

(4) For the purposes of this section, a person is not operating a registered scheme merely because:

(a) they are acting as an agent or employee of another person; or

(b) they are taking steps to wind up the scheme.

Meaning of financial product advice

(5) For the purposes of this section, financial product advice means a recommendation or a statement of opinion, or a report of either of those things, that:

(a) is intended to influence a person or persons in making a decision in relation to a particular financial product or class of financial products, or an interest in a particular financial product or class of financial products; or

(b) could reasonably be regarded as being intended to have such an influence;

but does not include anything in:

(c) a documentprepared in accordance with requirements of Chapter 7 of the Corporations Act, other than a document of a kind prescribed by regulations made for the purposes of this paragraph; or

(d) any other document of a kind prescribed by regulations made for the purposes of this paragraph.

(6) Advice given by a lawyer in his or her professional capacity about matters of law, legal interpretation or the application of the law to any facts is not financial product advice .

Meaning of dealing

(7) For the purposes of this section, the following conduct constitutes dealing in a financial product:

(a) applying for or acquiring a financial product;

(b) issuing a financial product;

(c) in relation to securities or managed investment interests - underwriting the securities or interests;

(d) varying a financial product;

(e) disposing of a financial product.

(8) Arranging for a person to engage in conduct referred to in subsection (7) is also dealing in a financial product, unless the actions concerned amount to providing financial product advice.

(9) A person is taken not to deal in a financial product if the person deals in the product on their own behalf, unless:

(a) the person is an issuer of financial products; and

(b) the dealing is in relation to one or more of those products.

(10) The regulations may prescribe conduct that is taken not to be dealing in a financial product.

Meaning of makes a market for a financial product

(11) For the purposes of this section, a person makes a market for a financial product if:

(a) either through a facility, at a place or otherwise, the person regularly states the prices at which they propose to acquire or dispose of financial products on their own behalf; and

(b) other persons have a reasonable expectation that they will be able to regularly effect transactions at the stated prices; and

(c) the actions of the person do not, or would not if they happened through a facility or at a place, constitute operating a financial market because of the effect of paragraph (16)(a).

Meaning of provide a custodial or depository service

(12) For the purposes of this section, a person (the provider ) provides a custodial or depository service to another person (the client ) if, under an arrangement between the provider and the client, or between the provider and another person with whom the client has an arrangement, (whether or not there are also other parties to any such arrangement), a financial product, or a beneficial interest in a financial product, is held by the provider in trust for, or on behalf of, the client or another person nominated by the client.

(14) However, the following conduct does not constitute providing a custodial or depository service :

(a) the operation of a clearing and settlement facility;

(b) the operation of a registered scheme, or the holding of the assets of a registered scheme;

(c) the operation of a regulated superannuation fund, an approved deposit fund or a pooled superannuation trust (within the meaning of theSuperannuation Industry (Supervision) Act 1993);

(d) the provision of services to a related body corporate;

(e) any other conduct of a kind prescribed by regulations made for the purposes of this paragraph.

Meaning of financial market

(15) For the purposes of this section, a financial market is a facility through which:

(a) offers to acquire or dispose of financial products are regularly made or accepted; or

(b) offers or invitations are regularly made to acquire or dispose of financial products that are intended to result or may reasonably be expected to result, directly or indirectly, in:

(i) the making of offers to acquire or dispose of financial products; or

(ii) the acceptance of such offers.

(16) However, the following conduct does not constitute operating a financial market for the purposes of this section:

(a) a person making or accepting offers or invitations to acquire or dispose of financial products on the person’s own behalf, or on behalf of one party to the transaction only;

(b) conducting treasury operations between related bodies corporate;

(c) conducting an auction of forfeited shares;

(d) any other conduct of a kind prescribed by regulations made for the purposes of this paragraph.

Meaning of clearing and settlement facility

(17) For the purposes of this section, a clearing and settlement facility is a facility that provides a regular mechanism for the parties to transactions relating to financial products to meet obligations to each other that:

(a) arise from entering into the transactions; and

(b) are of a kind prescribed by regulations made for the purposes of this paragraph.

(18) However, the following conduct does not constitute operating a clearing and settlement facility for the purposes of this section:

(a) an ADI (within the meaning of theBanking Act 1959) acting in the ordinary course of its banking business;

(b) a person acting on their own behalf, or on behalf of one party to a transaction only;

(c) a person who provides financial services to another person dealing with the other person’s accounts in the ordinary course of the first person’s business activities;

(d) the actions of a participant in a clearing and settlement facility who has taken on the delivery or payment obligations, in relation to a particular financial product, of another person who is a party to a transaction relating to a financial product;

(e) conducting treasury operations between related bodies corporate;

(h) operating a facility for the exchange and settlement of non-cash payments between providers of non-cash payment facilities;

(i) any other conduct of a kind prescribed by regulations made for the purposes of this paragraph.