Core obligations of an AFSL Holder

Legislation	Concepts	Key Cases	Comments
S 912(a) – Efficiently, honestly and fairly	The ultimate question is whether the appellant’s performance of their functions fell short of the reasonable standard of performance the public is entitled to expect of the licensee (Story v NCSC) and the standard encompasses conduct which isn't criminal but morally wrong in a commercial sense (RJ Elrington) [Not a breach] Isolated failure to adhere to a net tangible assets condition (RJ Elrington) [Breach] Providing investment advice in a position of a conflict of interest (RJ Elrington) [Breach] Failure to diligently transition a prescribed interest scheme to comply with MIS investments regime and properly informing investors about it (Re Koala Hydroponics) [Breach] ARs failure to make inquiries as to the merits of an investment promising absurdly higher returns and simply relying on other’s information to promote it (Re Foster v ASIC) [Breach] ARs failure to have a reasonable basis for a securities recommendation (Re Campbell v ASIC) [Breach[ Failure to disclose matters relevantly to a recommendation in breach of the FSG disclosure requirements (Re Jungstedt v ASIC)
S 961 – Best interests obligation to retail clients	[Content of obligations] S 961B This is satisfied if the provider has done each of the following: (a) Identified the objectives, financial situation and needs of the client that were disclosed to the provider by the client through instructions (b) Identified: (i) The subject matter of the advice that has been sought by the client (explicitly or implicitly) and (ii) The objectives, financial situation and needs of the client that would be reasonably considered as relevant to advice sought on that subject matter (client’s relevant circumstance) (c) Where it was reasonably apparent that information relating to the client’s relevant circumstances was incomplete/inaccurate, made reasonable inquiries** to obtain complete and accurate information (i) S 961C – reasonably apparent: apparent to a person with a reasonable level of expertise in the s.m. of the advice sought, exercising care and objectively assessing information (d) Assessed whether the provider has the expertise required to provide the client advice on the subject matter sought and, if not, declined to provide the advice (e) If, in considering the subject matter of the advice sought, it would be reasonable to consider recommending a FP: (i) Conducted a reasonable investigation into the FP that might achieve those of the objectives and meet those of the needs of the client that would reasonably be considered as relevant to advice on that subject matter; and (ii) Assessed the information gathered in the investigation (f) Based all judgments in advising the client on the client’s relevant circumstances (g) Taken any other step that, at the time the advice is provided, would reasonably be regarded as being in the best interests of the client, given the client’s relevant circumstances [Appropriateness] s 961G – The advice must only be provided if it would be reasonable to conclude the advice is appropriate [Warnings] S 961H – If advice is based on incomplete/accurate information a warning must be given at the same time and through same means the advice was provided [Priority in COI] s 961J – If any FSL or AR of them has a conflict between their interests and that of the client, they must give priority to the client’s interest [Auxiliary provisions] [Civil Penalty Provisions] These are all CPPs under s 961K for an AFSL and s 961Q for an AR (unless the AR reasonably relied on information/instructions given by the FSL s 961Q(2)) [Compliance by ARs] s 961L – FSL must take reasonable steps to ensure ARs comply with the above [Compensation actions] s 961M(1); s 961M(3) gives standing to apply to the client to get, compensation from the FSL (s 961M(2)) including profits (s 961M(4)**)

Definition of Financial Product
“a facility through or through the acquisition of with a person” (s 763A) does one of three prescribed actions Facility – includes a CAU or a scheme (s 761A, s 762C)
Makes a financial investment – s 763B	Manages a Financial Risk – s 763C	Makes non-cash payments – s 763D
[Requirements] (1) Giving money or money’s worth to (2) another who uses it to generate a financial return/benefit or intends to do so (3) The absence of pooling or day-to-day control over the use of the contribution [Examples] Shares/debentures/MIS interests/Super trusts/LI Depositing money with a ADI [Not] Real property, bullion, active day-to-day control of investments	[Requirements] (1) Managing financial consequences of circumstances happening OR (2) Avoiding/limiting the financial consequences of fluctuations in the value of receipts/costs (e.g. prices) [Examples] Insurance, futures, swaps A litigation funding arrangement (Chameleon Mining) Pre-paid service contracts, warranty arrangements (Barclay v ASIC – but see s 763E) [Not] Employing a theft security firm	[Requirements] (1) Making or causing payments to be made (2) Otherwise than by physical delivery of currency [Examples] Making payments through a facility for direct debit, deposit account Making payments by traveller’s cheques [Express exclusions] Provision of credit by a TP (e.g. a CC) – reg 7.1.06 Money orders by AU post, telegraphic transfers, intl. money transfers (reg 7.1.07F-G) Facilities through which payments can only be made to one person (s 763D(2)(a)(i) – e.g. gift cards)
Incidental Financial Products – s 763E	Express inclusions	Express exclusions
[Requirements] (1) An incidental component of a facility with other components (2) The main purpose of the components or facilities as a whole isn’t a financial product purpose (above 3) [Examples] Could include warranties and pre-paid service contracts (incidental to purchase/sale – Barclay v ASIC)	[Securities] s 764A(1)(a): shares/debentures/L&E rights in respect of these in a body, options to acquire by way of issue, rights issues [Derivatives] s 764A(1)(c): Option contracts + anything deriving changes in value from the price of an underlying commodity, index or cash flow [Expressly excludes] Forward contracts over the sale of tangible property [s 761D(3)(a) – provided that the seller’s obligations cannot be settled in cash [Margin lending facility] s 764A(1)(l) [Other inclusions] Prudentially regulated financial products Government securities FX contracts where currency isn’t immediately exchanged	[Credit facility] s 765A(1)(h) as defined in s reg 7.1.06: The provision of credit for any period that is not making a financial investment or most of the express inclusions The provision of credit by a pawnbroker, trustee, employer A mortgage that secures obligations under a credit contract and is not making a financial investment or most of the express inclusions Chameleon Mining (HC)– a CAU that is any form of financial accommodation and its provision for any period will be a credit facility . Thus an LFA is a credit facility [s 12BAA(7)(k) ASICA] – credit facilities are financial products under these sections (MODC, CPL) [Others] Retirement village interests, undertakings by a BC to pay an RBC, health insurance, reinsurance, interests in super funds, interests in non-registered MIS, funeral benefits, physical equipment/infrastructure

S 911A: A person who carries on a financial services business (FSB) must hold an AFSL covering the provision of an FS

(s 766A(3) contains an exception for work ordinarily done by clerks or cashiers; s 766A(1)(a) for general advice given by the issuer of an FP to a AFSL who will give advice)

“A person provides a financial service if they” (s 763A) do one of six prescribed actions including

Financial Product Advice – s 766B

Dealing – s 766C

Makes a market for an FP – s 766D

Provides a custodial or depository service s 766E

[Requirements]
- (1) A recommendation, statement of opinion or report of either
- (2) Intended to influence a person’s decision irt a (/class of) FP or interest in thereof OR
- (3) Could reasonably be regarded as being intended to have such an influence
[Classifications] s 766B(3)-(4):
- Personal advice – FPA directed to a person where
  - The provider has considered 1+ of the person’s O/FS/N; or
  - A RP might expect them to have so considered
- General Advice – advice not personal: s 949A provides that you must make a general advice warning [s 1311(1) offence [100 PU, 200PU for failing to take reasonable steps to ensure ARs do it]
[Exclusions]
- S 766(5): Lawyers about interpretation of law;
- s 766(6) Telling costs of an FP in response to a request for a cost estimate

[Requirements] (1) Dealing includes:
- Applying for/acquiring a FP
- Issuing a FP
- Varying/Disposing a FP
- (2) Arranging for a person to engage in (1) unless these actions were under s 766B
[Exclusions]
- (3) Dealing on your own behalf unless you are an issuer of financial products or are dealing in relation to these FPs
- (4)(c): A body corporate dealing in securities of itself [unless (5): it carries on a business of investment in securities)
[Examples]
- Decisions made to make additional payments/ contributions to an FP already owned

[Requirements] (1)
- A facility or at a place where one regularly states prices at which they propose to acquire/dispose of FP on their own behalf AND
- Others have a reasonable...

#7207 - Securities And Financial Services Regulation Super Summaries - Securities and Financial Services Regulation

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