Topic 4

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Topic 4: Overview of financial services

law and regulations
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Topic 4: Overview of financial services law and regulations
Economic and Legal Context for Financial Planning
Contents
Overview .........................................................................................................................................4.1
Topic learning outcomes ......................................................................................................................... 4.1
1 Purposes of financial services law ........................................................................................4.2

1.1 Advantages of a well-regulated financial system ....................................................................... 4.2
2 Development of current financial services law .....................................................................4.3

2.1 Financial services law .................................................................................................................. 4.3
2.2 Regulatory structure ................................................................................................................... 4.9
2.3 Background to reforms ............................................................................................................. 4.10
3 Chapter 7 of the Corporations Act 2001 (Cth) ..................................................................... 4.13

3.1 Objects of Chapter 7 of the Corporations Act .......................................................................... 4.14
3.2 Key definitions .......................................................................................................................... 4.15
4 Participants’ roles, obligations and rights ........................................................................... 4.23

4.1 Federal government.................................................................................................................. 4.23
4.2 Courts ........................................................................................................................................ 4.23
4.3 Regulatory authorities .............................................................................................................. 4.23
4.4 Financial services providers ...................................................................................................... 4.24
4.5 Compliance ............................................................................................................................... 4.31
5 Regulatory reform and current issues ................................................................................ 4.33

5.1 Key reviews and developments within the financial services industry .................................... 4.33
5.2 Financial adviser education standards...................................................................................... 4.46
6 Impact of ongoing reforms ................................................................................................. 4.51

6.1 Impact and cost of FOFA ........................................................................................................... 4.52
Economic and Legal Context for Financial Planning | FPCB001B_T4_v3 © Kaplan Higher Education
Topic 4: Overview of financial services law and regulations
7 Overseas financial services systems ................................................................................... 4.54

7.1 Introduction .............................................................................................................................. 4.54
7.2 Cross-border regulation ............................................................................................................ 4.55
7.3 New Zealand ............................................................................................................................. 4.55
7.4 United Kingdom ........................................................................................................................ 4.56
7.5 Singapore .................................................................................................................................. 4.56
7.6 United States ............................................................................................................................. 4.57
7.7 Hong Kong ................................................................................................................................. 4.57
8 Conclusion ......................................................................................................................... 4.58
References .....................................................................................................................................4.59
Suggested answers ........................................................................................................................ 4.63
4.1
Overview
This topic begins with an overview of the purposes of financial services law and the advantages of
having a well-regulated financial services system. It provides an outline of the main laws governing
the system followed by a focus on the centrepiece of financial services law, the Corporations Act
2001 (Cth). The development of the Corporations Act is considered as well as the civil and criminal
penalty regimes set up by the Act.
Australia has chosen a ‘two principal regulators’ model to supervise the financial services system.
This topic canvasses this model and assesses whether or not it has been a success.
An outline of the roles, obligations and duties of the main participants in the Australian financial
services system are also outlined. The general duties and obligations of tax (financial) advisers are
prescribed in:
• the Corporations Act
• the law of contract
• the law of negligence
• fiduciary relationships
• industry body codes and guidelines.
The regulation of financial products and services and its impact on tax (financial) advisers and
licensees is then considered by examining the objects and key definitions of Chapter 7 of the
Corporations Act.
The final section of the topic reviews a number of overseas financial services systems. These systems
are important because of the need for the Australian system to align with them to some extent,
as well as the increasing investment by Australians in those systems.
The obligations of Australian financial services licensees are covered in detail in Topic 6.
This topic specifically addresses the following subject learning outcomes:
4. Examine some of the major issues currently facing the financial planning industry in Australia.
5. Explore the main sources of law and the regulatory structure of financial services law in Australia.
6. Explain the various obligations imposed on participants by financial services legislation.
Topic learning outcomes

On completing this topic, students should be able to:
• analyse the regulatory structure for financial services in Australia
• describe the role, obligations and rights of the main participants in the financial services system
• explain the purposes of financial services law and the main laws regulating the Australian financial
services system
• outline the background to the Corporations Act and its civil and criminal penalty regime
• explain the objects and key definitions under Chapter 7 of the Corporations Act
• explain recent developments in the regulation of the financial services system, especially in
connection with financial advice and financial planning
• describe the main features of overseas financial systems relevant to Australia.
4.2
1 Purposes of financial services law

The main purpose of financial services law is to maintain, facilitate and improve the performance
of the financial system and the entities within this system in order to:
• create commercial certainty
• increase market efficiency
• reduce business costs
• encourage investor confidence.
The end product of achieving these goals is to contribute to the development of the Australian
economy and quality of life.
The law also balances the conflict between some of these goals. For example, investor confidence
may be encouraged by more and more market regulation. However, an over-regulated market would
be likely to lose some of its efficiency and flexibility. This can have the effect of investors preferring a
more efficient overseas market. Conversely, too little regulation will equally discourage investors
who will then also seek other places to invest their money.
The pendulum of regulation tends to swing backward and forward depending on the commercial
environment and community expectations. If there are many corporate collapses, or exposure of
systemic financial services misconduct as occurred during the Royal Commission into Misconduct in
the Banking, Superannuation and Financial Services Industry (Banking Royal Commission) in 2018,
there is a move towards greater regulation. Conversely, if the market becomes inflexible or
inefficient, there is a move towards a more ‘soft touch’ regulation.
1.1 Advantages of a well-regulated financial system

The advantages of Australia’s well-regulated financial system were summarised in a speech
by Jeremy Cooper, the former deputy chairman of ASIC, as follows:
In our well-regulated environment:
• Companies can get on with doing business confident that the same rules apply to
everybody. They can seek capital in Australian markets at rates that are broadly
competitive with leading world markets and without paying a significant market
risk premium;
• Financial services businesses can operate profitably and efficiently, while treating
customers honestly and fairly. Being in a well-regulated market also helps them do
business across borders;
• Financial markets are well respected and attractive internationally, and are clean,
fair and reliable;
• All participants can understand their obligations;
• Investors and consumers can participate confidently in the financial system,
using reliable and trustworthy information to make decisions, with access to
suitable remedies if things go wrong; and
• The community is confident that markets, corporations and the businesses involved
in them operate efficiently and honestly and contribute to improving Australia’s
economic performance. Firm action is taken against fraud, dishonesty and
misconduct. The regulatory system is respected.
(Cooper 2006)
4.3
2 Development of current financial services law

This section considers the background to the current financial services law and the main elements of
this law (particularly the Corporations Act). Australia has adopted the ‘two principal regulators
model’ to supervise this law, which is evaluated below.
2.1 Financial services law

The key pieces of legislation governing the Australian financial services industry are outlined in this
section.
Key legislation
The main legislation is summarised below.
Corporations Act 2001 (Cth)
Key concept: Corporations Act

The most important law governing the financial services industry is the Corporations Act.
Among other things, the Act covers the following:
• Financial services: The Act provides for the Australian financial services (AFS) licence
regime and the supervision of participants in the financial services industry.
• Market regulation: The Act provides for ASIC’s licensing and supervision of financial
markets, including the Australian Securities Exchange (ASX).
• Corporations: The Act sets out the requirements for the operation of corporations,
such as registration, directors’ duties, financial reporting, market disclosure,
shareholders’ rights and powers, takeovers, administration and winding up.
Other legislation that is relevant to the financial services industry is outlined below.
Australian Securities and Investments Commission Act 2001 (Cth)

The Australian Securities and Investments Commission Act 2001 (Cth) established the Australian
Securities and Investments Commission (ASIC) and sets out its powers and functions. In particular,
it provides for consumer protection in relation to financial services by prohibiting misleading,
deceptive or unconscionable conduct and false or misleading misrepresentations.
4.4
Australian Prudential Regulation Authority Act 1998 (Cth)

The Australian Prudential Regulation Authority Act 1998 (Cth) established the Australian Prudential
Regulation Authority (APRA). Section 8 of the Act describes the purpose of APRA as follows:
1. APRA exists for the following purposes:
(a) regulating bodies in the financial sector in accordance with other laws of the
Commonwealth that provide for prudential regulation or for retirement income
standards;
(b) administering the financial claims schemes provided for in the Banking Act
1959 and the Insurance Act 1973;
(c) developing the administrative practices and procedures to be applied in
performing that regulatory role and administration.
2. In performing and exercising its functions and powers, APRA is to balance the
objectives of financial safety and efficiency, competition, contestability and
competitive neutrality and, in balancing these objectives, is to promote financial
system stability in Australia.
Reserve Bank Act 1959 (Cth)

The Reserve Bank Act 1959 (Cth) established the Reserve Bank of Australia (RBA), which has the
principal function of formulating and implementing monetary policy.
Competition and Consumer Act 2010 (Cth)

The Competition and Consumer Act 2010 (Cth) came into effect on 1 January 2011 and replaced
the Trade Practices Act 1974 (Cth). The objective of this Act is to enhance the welfare of Australians
through the promotion of competition and fair trading and to provide consumer protection.
The Australian Competition and Consumer Commission (ACCC) is responsible for administering
this Act.
David Bradbury (Parliamentary Secretary to the Treasurer) commented on the consolidation
of consumer protection law in Australia:
The Trade Practices Act 1974 represented a significant leap forward in Australian
consumer protection law, however, the Act had its limitations — specifically its
constitutional limitations.
While the Trade Practices Act would remain the cornerstone of Australia’s national
consumer protection regime for the next 37 years, the assumed limits on the
Commonwealth’s power under the Constitution meant that it continued to apply to a
patchwork set of entities and situations and was supplemented by separate fair trading
and consumer protection laws in each of the States and Territories.
In total, the maze of Australian consumer protection law had become characterised
by more than 900 provisions in 20 separate laws around the country. All of this
regulation, all of this red tape across a single national economy consisting of a mere
22 million people.
All of this was to change on the 1st of January this year, when a single set of consumer
laws came into effect across the Australian economy.
(Bradbury 2011)
4.5
Other Acts
There are also a number of Acts that provide for the regulation of particular segments and products
in the financial services system, such as the Superannuation Industry (Supervision) Act 1993 (Cth),
the Insurance Act 1973 (Cth), the Insurance Contracts Act 1984 (Cth) and the Life Insurance Act 1995
(Cth). The Australian Government enacted the National Consumer Credit Protection Act 2009 (Cth),
transferring responsibility for the regulation of consumer credit (including home loans, personal
loans, credit cards and lines of credit) from the states and territories to ASIC.
Evolution of the Corporations Act

In Topic 3, the Corporations Act was used to demonstrate how legislation works. The following
discussion provides some further history of the Corporations Act.
Company and securities law

Company and securities law has had a chequered history in Australia, mainly because of the federal
system. The law was originally a state responsibility and each state had a Companies Act. In 1961,
several states adopted virtually identical Companies Acts in an attempt to bring about some
uniformity. Some states soon broke ranks and passed laws that were different once again from the
other states.
This was clearly an unsatisfactory situation and, in 1981, a Cooperative Scheme was established.
The scheme involved the federal and state governments entering into an agreement under which
the states agreed to enact legislation applying a federal Act or regulation as state law.
The failure of the Cooperative Scheme led to the recommendation by the Senate Standing
Committee on Constitutional and Legal Affairs in 1987 that the scheme be replaced by federal
legislation to cover all of the areas dealt with by the scheme. This recommendation resulted in a
Corporations Law regime which operated by virtue of application of laws legislation in each state and
the Northern Territory, based on law applied in the Australian Capital Territory.
This Corporations Law regime was held by the High Court to be unconstitutional in certain respects,
that is, offences against the state-based corporations laws could not be pursued by the
Commonwealth Government or entities. The two main cases, referred to in the explanatory
documents to the Corporations Bill 2001, were Re Wakim; Ex parte McNally [1999] HCA 27,
and R v Hughes [2000] HCA 22. To remove constitutional doubt, the state governments agreed that
the substance of the Corporations Law regime and an amendment power would have to be formally
referred to the federal government.
The present Corporations Act then evolved from 2001. The constitutional basis for the
Corporations Act is set out in s 3 of the Act.
Financial services reform

The present financial services industry regime largely resulted from amendments to the
Corporations Act by the Financial Services Reform Act 2001 (Cth), which commenced operation
in March 2002.
The three key reforms introduced were a:
• harmonised licensing, disclosure and conduct framework for all financial services providers
• consistent and comparable framework for financial product disclosure
• streamlined regulatory regime for financial markets as well as clearing and settlement facilities.
4.6
However, there have been many further significant reforms to financial services since the
introduction of the Financial Services Reform Act, as outlined in Table 1 below:
Table 1 Timeline of post-implementation reforms to financial services reform legislation

Post-implementation reforms to financial services reform (FSR)
2004 FSR Transition ends
2005 FSR Refinements. Statutory Conflicts Management Obligation
2007 Simpler Regulatory System Reforms. Enhanced Fee Disclosure
2008 Global Financial Crisis
2009 Rippoll Report
2010 Margin Lending Reforms. Simple PDS Reforms. ASIC Act Reforms. Cooper Review of Superannuation
2012 FOFA Reforms
2013 Accountants Limited Licensing
2014 Performance of ASIC Report. Murray Financial Systems Inquiry
2015 Financial Adviser Register
2017 Ramsay Review of External Dispute Resolution. Productivity Commission Review of Competitiveness in
Superannuation. ASIC Enforcement Review
2018 Life Insurance Commission Reforms. Education and Ethics Requirements for Advisers. FASEA.
Productivity Commission Inquiry into Competitiveness in the Financial Sector
2019 Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry Final Report.
Source: Hanrahan 2018.
Criminal and civil penalty regimes under the Corporations Act

The penalties imposed by the Corporations Act are discussed below. In early 2019, the criminal and
civil penalties regime was revised by the Treasury Laws Amendment (Strengthening Corporate and
Financial Sector Penalties) Act 2019 (Cth), which implemented recommendations of the ASIC
Enforcement Review Taskforce to increase penalties across the board.
Criminal penalty
Failure to comply with many of the Corporations Act provisions may be a criminal offence.
Some provisions will specify that failure to comply is an offence (see, for example, s 1021C, being the
offence of not providing a required disclosure document to another person). However, in most cases,
provisions do not specify whether it is an offence to fail to comply with the provision.
If the provision does not mention non-compliance, it is necessary to check whether the provision is
listed in Schedule 3 of the Corporations Act. If it is listed, it will be a criminal offence and a penalty
will be prescribed in Schedule 3.
If a provision does not mention non-compliance and is not listed in Schedule 3, a person cannot be
prosecuted for failure to comply with the provision (see, for example, s 1041H). In this case, a person
who contravenes the provision is subject to civil liability only.
Schedule 3 refers to ‘penalty units’. A penalty unit is currently set at $222 (s 4AA, Crimes Act 1914
(Cth)), as the $210 base unit was indexed in July 2020 according to the formula in the legislation.
Therefore, if the prescribed penalty is ‘10 penalty units’, the penalty is $2,220.
4.7
Penalties can be very severe. For example, the penalty for failing to comply with s 1043A(1)
of the Corporations Act (‘Prohibited conduct by person in possession of inside information’)
is imprisonment for up to 15 years, or a civil penalty order of up to $3.33 million
(15,000 penalty units).
Civil penalty
Part 9.4B of the Corporations Act provides for financial services civil penalty provisions, such as
continuous disclosure (ss 674 and 675), market misconduct (ss 1041A, 1041B, 1041C and 1041D),
and insider trading (s 1043A). Section 1317G is the provision which sets calculations and limits for
civil penalty amounts.
If a court is satisfied that one of these provisions has been contravened, it can make a declaration of
contravention. Once this declaration has been made, the court may impose a pecuniary (monetary)
penalty of up to 5,000 penalty units, or $1.05 million, for an individual; however, if the court can
determine the benefit derived and detriment avoided because of the contravention, a penalty of up
to three times that amount, or 15,000 penalty units ($3.33 million), may be applied.
A declaration of contravention or a pecuniary penalty may not, however, be made against a person
who has been found guilty of a criminal offence. To that extent, the civil penalty regime operates as
an alternative to the criminal penalty regime.
The penalty for a body corporate is the greatest of:
• 50,000 penalty units ($11.1 million)
• If the Court can determine the benefit derived and detriment avoided because of the
contravention, three times the penalty, or up to 150,000 penalty units ($33.3 million)
• A penalty of between $33.3 million and $555 million (2.5 million penalty units), based on a
calculation of 10% of the turnover of the body corporate in the 12-month period following
the contravention, or from the end of month following the beginning of the contravention.
The penalty is capped at 2.5 million units, that is, the penalty does not scale according to
annual turnover beyond $5.55 billion.
As can be seen, enormous civil penalties can be imposed for contraventions, once the turnover of the
company exceeds $333 million per annum.
A proceeding for a civil penalty is a hybrid of a criminal prosecution and a civil action. The civil burden
of proof and civil procedure apply but the court can impose a significant civil monetary penalty.
Recently, the courts have tended to interpret these actions as quasi-criminal and have imposed
procedural restrictions similar to those required for criminal prosecution.
Application of the federal Criminal Code

The federal Criminal Code applies to offences under the Corporations Act, unless the
Corporations Act provides otherwise. The Criminal Code can be found in the Schedule to the
Criminal Code Act 1995 (Cth). It sets out the principles of criminal responsibility in respect of offences
under federal Acts.
The Criminal Code distinguishes each element of an offence as:
• the conduct
• a result of the conduct
• the circumstance in which the offence occurs.
These are called ‘physical elements’.
4.8
Example: Physical elements of an offence

Section 1041B(1) of the Corporations Act prohibits a person from doing an act
(e.g. buying shares) if that act has the effect of creating a false or misleading appearance
with respect to the price for trading in financial products on a financial market.
Here, the buying of the shares is the ‘conduct’ and the creation of a false or misleading
appearance is the ‘result’ of that conduct.
Fault elements specified in the Criminal Code

For each of the physical elements, the Criminal Code specifies a certain state of mind that the
prosecution must establish. These are called ‘fault elements’ (see Criminal Code, Part 2.2, Division 5)
and apply as follows:
• Conduct — the relevant fault element is ‘intention’. For any conduct specified in an offence, it is
necessary to prove that the person meant to engage in that conduct. Therefore, in s 1041B of the
Corporations Act example above, it means that the prosecution has to prove the person meant to
buy the shares.
• Result — the relevant fault element is ‘intention’, ‘knowledge’ or ‘recklessness’. Therefore, in
relation to the ‘result’ of the conduct (e.g. the false or misleading appearance), the person must:
– mean to bring about the result or be aware that it will occur in the ordinary course of events
(intention), or
– be aware that the result (the false or misleading appearance) will exist in the ordinary course
of events (knowledge), or
– be aware of a substantial risk that the result (the false or misleading appearance) will occur
and, having regard to the circumstances known to the person, it is unjustifiable to take that
risk (recklessness).
• Circumstance — the relevant fault element is ‘intention’, ‘knowledge’ or ‘recklessness’.
Therefore, for any circumstance in which the conduct occurs specified in the offence, the person
must:
– believe the circumstance exists or will exist (intention), or
– be aware that the circumstance exists or will exist in the ordinary course of events
(knowledge), or
– be aware of a substantial risk that the circumstance exists or will exist and, having regard
to the circumstance known to the person, it is unjustifiable to take the risk (recklessness).
Fault elements specified in Corporations Act

Where a provision in the Corporations Act specifies a fault element, that is the one that applies and
not those set out in the Criminal Code.
For example, s 1041E of the Corporations Act prohibits a person from making a statement or
disseminating information that is false in a ‘material particular’ or is materially misleading. If the
Criminal Code applied to this provision, the person must ‘intend’, ‘have knowledge of’ or be ‘reckless’
that the statement was false in a material particular or materially misleading (the ‘circumstance’ in
which the conduct occurs). However, s 1041E itself provides its own broader fault element, that is,
the person does not care whether the statement or information is true or false, or the person knows,
or ought reasonably to have known, that the statement is false or is materially misleading.
4.9
Similarly, to prove a contravention of s 1041E, it is also necessary to prove the statement or

information was likely to induce persons to apply for financial products. This is the ‘result’ of the
conduct. Ordinarily, the Criminal Code would apply so that the person must be shown to intend,
have knowledge of, or be reckless as to this element. However, s 1041E provides its own fault
element of strict liability. Therefore, in a prosecution for an offence under this section, it is not
necessary to prove that the person had intended, had knowledge of, or was reckless as to the result.
Other enforcement options under the Corporations Act

Liability for civil remedies and administrative remedies are also available in the event of breaches of
the Corporations Act.
Civil liability
Failure to comply with the provisions of the Corporations Act may expose the person to civil liability.
Where the courts find that a contravention has occurred, they have broad powers to make orders,
for example to stop the offending conduct and to remedy the breach, including by payment of
compensation.
A person who has standing (e.g. ASIC or a person whose interests are affected by the conduct)
may institute civil proceedings. ASIC frequently institutes civil proceedings seeking injunctive relief,
such as freezing orders, because this provides a quick response that can halt offending conduct
and possibly protect assets from being moved or spent, which can help those who have suffered.
This can be followed up by prosecution of the offender for a criminal offence if ASIC considers that
punitive action is appropriate and if evidence exists that would satisfy the criminal standard of proof.
Administrative remedies
ASIC has powers to take action in response to some contraventions without instituting court
proceedings. In particular, ASIC can revoke a financial services licence or make a banning order under
section 920A, prohibiting a person from providing any financial service (either permanently or for a
specified period of time). ASIC has to comply with the rules of procedural fairness where it exercises
these types of powers.
2.2 Regulatory structure

Australia is recognised internationally for the strength of its financial regulatory regime and its
market integrity. The industry has been through significant regulatory change, especially since
the Australian Financial System Inquiry (Wallis Inquiry) commenced in 1996. The mission
statement included in the terms of reference for the Wallis Inquiry was:
The Inquiry is charged with providing a stocktake of the results arising from the financial
deregulation of the Australian financial system since the early 1980s. The forces driving
further change will be analysed, in particular, technology development.
Recommendations will be made on the nature of the regulatory arrangements that will
best ensure an efficient, responsive, competitive and flexible financial system to underpin
stronger economic performance, consistent with financial stability, prudence, integrity
and fairness.
(The Treasury 1997)
4.10
2.3 Background to reforms

Since 1997 there has been a series of major legislative reforms starting with the following:
• Managed Investments Act 1998 (Cth)
• Financial Services Reform Act 2001 (Cth)
• Superannuation Legislation Amendment (Choice of Superannuation Funds) Act 2004 (Cth)
• Corporate Law Economic Reform Program (Audit Reform and Corporate Disclosure) Act 2004 (Cth)
• Superannuation Legislation Amendment (Superannuation Safety and Other Measures) Act 2006 (Cth)
• Tax Laws Amendment (Simplified Superannuation) Act 2007 (Cth)
• Corporations Amendment (Life Insurance Remuneration Arrangements) Act 2017 (Cth)
• Corporations Amendment (Professional Standards of Financial Advisers) Act 2017 (Cth)
• Financial Sector Reform (Hayne Royal Commission Response—Protecting Consumers
(2019 Measures)) Act 2020 (Cth)
• Financial Sector Reform (Hayne Royal Commission Response—Stronger Regulators
(2019 Measures)) Act 2020 (Cth).
It is fair to say that Australia’s regulatory regime has been through an enormous amount of reform
and continues to develop in a consultative and transparent way with input from government,
regulators and industry representatives.
The concern of government, industry and regulators is that the increasing volume of rules
and legislation has come at great financial cost to the industry and the investing public.
Regulation results in substantial cost to the industry, requiring, for example, changes to
systems, documentation, policies and procedures, staff training, customer education,
licence authorisations/amendments and compliance.
These costs are inevitably passed on to the investor or client. So, while regulatory reform is
essential, it is important that the right balance between costs and benefits is achieved.
Wallis Inquiry
Before 1991, responsibility for financial services and consumer protection services was spread across
a number of different federal, state and territory agencies. They included the National Companies
and Securities Commission (NCSC), which was established in 1980, and the Corporate Affairs
Commissions of the states. The NCSC was wholly replaced by the Australian Securities Commission
(ASC) in 1991.
The current regulatory structure came about as a result of the federal government’s Financial System
Inquiry (known as the ‘Wallis Inquiry’) which reported in 1997. The Wallis Inquiry put forward three
possible options for financial regulation:
• single regulator model — a single regulator would cover market regulation, consumer protection
and prudential regulation
• lead regulator model — a regulator would gather and disseminate information about the
operation of a diversified financial group to other agencies and coordinate problems arising with
the group
• two-regulator model — one regulator would cover any market and disclosure regulation of
financial products and another regulator oversee any entity that needed prudential regulation.
4.11
Present regulatory structure

At the recommendation of the Wallis Inquiry, the two-regulator ‘twin peaks’ model was adopted
by the federal government. General information on the Wallis Inquiry can be found on the
Commonwealth Treasury website (1997a).
The primary financial system regulators resulting from the Wallis Inquiry were:
• ASIC — the ASC was renamed ASIC in 1998 and took responsibility for market and disclosure
regulation
• APRA — established in 1998, it is responsible for prudential regulation.
The federal government left two related regulators in place — the RBA (responsible for the stability
of the system mainly through monetary policy) and ACCC (responsible for anti-competitive
behaviour).
The functions and powers of these regulators are discussed in Topic 5.
Has the structure been successful?

Australia’s financial regulatory system is continually evolving. The level of success of the system
and reforms following the Wallis Inquiry is therefore going to be different at any given time.
However, the position of the ASX among world markets, the amount of overseas investment in
Australia and the continued strength of the Australian economy suggest that the structure has been
working well overall.
Nevertheless, Australia’s financial regulatory system has faced a number of significant challenges,
including the collapses of HIH (in 2001), Westpoint (2006), Fincorp (2007) and the global financial
crisis (GFC) of 2008–09. The effectiveness of the current structure of Australia’s financial regulatory
system has been, and continues to be, debated and evaluated. The following examples highlight this.
Firstly, in 2004, the federal government’s Financial Sector Advisory Council (FSAC) conducted the
Review of the Outcomes of the Financial Services Inquiry 1997. The council’s major findings on the
regulatory framework were:
• Australia should resist any tendency towards unnecessary re-regulation of the
financial sector, particularly prescriptive regulation, as it may come at the cost of
hampering business investment opportunities in Australia and abroad, and limit the
economic benefits for the national economy; and
• regulators should be encouraged to take a global view in their deliberations,
particularly considering the dimensions of international competitiveness and
consumer protection measures.
(FSAC 2004)
Secondly, in 2006, a report by the federal government’s Taskforce on Reducing Regulatory Burdens
on Business, ‘Rethinking Regulation’, noted:
Australia’s financial and corporate sectors, and the associated regulatory structures,
are highly regarded internationally. Moreover, the broad policy framework has
widespread support within business and the wider community in Australia.
(Regulation Taskforce 2006)
Thirdly, the GFC of 2008–09 again raised questions about the effectiveness of Australia’s
financial regulatory system — particularly in light of the collapses of Australian financial services
businesses including Storm Financial, Opes Prime, Allco and Babcock & Brown. In particular,
some commentators questioned whether Australia’s financial regulatory system should have
prevented such ‘flawed business models’.
4.12
ASIC’s former chairman, Mr Tony D’Aloisio, explained how Australia’s current financial regulatory
system defines and, in some respects, limits the roles of regulators such as ASIC and APRA:
Under our system, responsibility for flawed business models lies with management and
with their Boards. It’s part of the ‘free enterprise’ system. Nevertheless, in the broader
community and parts of the media, there is a misunderstanding and, at times,
a perception that ASIC is, in effect, a ‘guarantor of last resort’ of investor risk
(particularly where retail investors may be involved).
Let me therefore expand on my answer on why ASIC is not in the position to prevent
the failure of business models.
In 1996 the Wallis Inquiry was set up to examine the deregulation which had followed
the [1981] Campbell Report. The Wallis Inquiry produced a report that made a series
of recommendations concerning the operation of the financial markets including what
was to become known as the ‘twin peaks policy’. The Howard-Costello Government
implemented significant aspects of this ‘twin peaks policy’.
The first peak, APRA, regulates ADIs, important systemic institutions, which Government
believe need to have their business models prudentially regulated.
The second peak (ASIC) regulates securities and investments … Unlike intermediaries
(banks and insurance companies) the policy (reflected in the Wallis Report) was that
financial markets did not need prudential regulation. As was said by commentators at
the time, at the centre of the Wallis Report was the view that efficiency of the capital
markets would be enhanced by the absence of capital backing regulation and these
markets only needed disclosure and transparency and enforcement of proper market
conduct for their operation (e.g. the development of the securitisation markets is a
good example of the working of that policy). They did not need prudential standards.
This policy behind this second peak is reflected in the Corporations Act and in ASIC’s role
and powers …
Our Corporations Act is self-executing — that is, it is left to the market participants to
comply with the law. Rules are around disclosure and preventing market abuse.
ASIC, unlike APRA, is an oversight and enforcement body. We are not a prudential
authority. Several things flow from this difference:
• Inevitably ASIC will come in after a collapse has occurred. We are there, as an
oversight body, to see if the law was complied with and, as such, we will arrive
‘at the scene of the accident’ (i.e. after the accident to see who caused it!).
• Our powers to act ahead of time are limited. For example, we do not have power
to regulate capital adequacy or to prohibit certain business models.
ASIC was simply not designed or equipped to regulate the financial markets to,
for example, ensure capital adequacy. Indeed, the underpinning policy behind the
legislation (Corporations Act) does not do that. This is why the answer to the question
of whether ASIC could have prevented these flawed business models is clearly ‘no’.
(D’Aloisio 2009)
Finally, the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services
Industry (the Royal Commission) in 2018 brought into the sunlight a multitude of issues that had
been steadily building over a protracted period. Far from all participants living up to the expectation
of client welfare, trustworthy behaviour and impartial advice, the Royal Commission showed the
opposite had been occurring in some sectors through targeting examples from across the industry.
The conduct that was tactically chosen by Counsel assisting the Commissioner detailed
non-compliance with best practice, services that were contrary to client best interests, self-indulgent
and at times reckless behaviour, and regulators who were absent, or unwilling to act.
4.13
While the Royal Commission did not manifest around a single major failing, it was called for
numerous times by the federal opposition in the years preceding it, as more and more grievances
about financial institutions, and particularly banks, came to light. The open manner in which the
Royal Commission hearings were conducted, the availability of all materials to the public and the
media coverage of proceedings created a spectacle which sparked public interest more than a
quietly conducted inquiry and subsequent report. This drove the public to question their own
relationships with financial institutions and created a higher level of awareness of the role of
agencies such as the financial services dispute resolution schemes (which merged to become AFCA),
ASIC and other bodies.
The government responded to Commissioner Hayne’s final report with overwhelming support and
promised to implement almost all recommendations. Regulator capabilities were reviewed, and the
complaints process was expanded to allow legacy complaints to be brought up to AFCA. Overall, the
Royal Commission’s examination of systemic misconduct perhaps caused more fear in, and a greater
shakeup of, the financial services sector than any previous review or scandal.
Review your progress 1

1. What are the aims of financial services law?
2. What are the advantages of having a well-regulated financial services system?
3. What is the main legislation governing the financial services industry?
4. What two penalty regimes are provided for under the Corporations Act?
5. Which model of financial regulation proposed by the Wallis Inquiry has Australia
adopted?
Reflect on this: Future regulation

Refer to the above discussion:
• What do you think future regulation will need to address to help prevent or manage
another crisis?
• Is there a danger of over-regulation? Why?
3 Chapter 7 of the Corporations Act 2001 (Cth)

If an individual person or an entity engages in activity that is within the framework of Australian
financial services laws or under Australian taxation laws, such activity is referred to as ‘regulated
activity’ (e.g. the provision of advice on products regulated under Chapter 7 of the Corporations Act).
A person or entity may provide services in the pursuit of their occupation or profession, which
includes non-regulated activities. Non-regulated activities might include providing services including
advice to a client on subjects such as cash flow management or broad financial strategy not involving
regulated products. A person’s activity is, in addition to being regulated by statute, subject to the
general law. The law of contract and the law of negligence create additional duties that apply to the
provision of financial advice and services. Depending on the circumstances of the relationship
between the person providing and the person receiving financial advice, the person providing
financial advice may also owe fiduciary duties to their client.
4.14
3.1 Objects of Chapter 7 of the Corporations Act

The objects of Chapter 7 of the Corporations Act are set out in s 760A:
The main object of this Chapter is to promote:
(a) confident and informed decision making by consumers of financial products and
services while facilitating efficiency, flexibility and innovation in the provision of
those products and services; and
(b) fairness, honesty and professionalism by those who provide financial services; and
(c) fair, orderly and transparent markets for financial products; and
(d) the reduction of systemic risk and the provision of fair and effective services by
clearing and settlement facilities.
Table 2 below provides an overview of the legal framework for financial advice.
Table 2 Legal framework for the provision of financial advice

Giving financial advice to households
General law duty of care If the advice is provided pursuant to an agreement or retainer,
the contracting party will owe contractual duties, including an implied duty
of care. An adviser can also be liable in negligence.
Fiduciary duties If (as is likely in the case of personal advice) the adviser is a fiduciary,
the ‘no-conflicts’ and ‘no-profits’ rules apply.
AFS licensing requirements and An AFS licensee must have the capacity to comply with its obligations in
obligations in Corporations Act, Pt 7.6 s 912A, and comply with those obligations and its licence conditions.
Conduct of business rules in Corporations An AFS licensee must comply with requirements relating to
Act, Pt 7.8, Div 7 unconscionability, client orders and dealing in markets.
ASIC Act, Pt 2, Div 2 The Part prohibits unfair contract terms, unconscionable conduct,
misleading or deceptive conduct and unfair sales practices, and contains
implied warranties.
Corporations Act, Pt 7.10 The Part prohibits false or misleading statements, fraudulently inducing
dealing, dishonest conduct, and misleading or deceptive conduct.
Additional requirements for advising retail clients

Additional licensing requirements in The licensee must have a complying dispute resolution system and
Corporations Act, Pt 7.6 compensation arrangements.
Disclosure requirements in Corporations This Part contains mandatory disclosure (Financial Services Guide)
Act, Pt 7.7 and general advice warning requirements.
Additional requirements for giving personal advice to retail clients

Disclosure requirements in Corporations This Part contains mandatory disclosure (Statement of Advice)
Act, Pt 7.7 requirements.
Pre-FOFA: Corporations Act, Pt 7.7 The licensee must satisfy the suitability rule in giving advice.
Post-FOFA: Corporations Act, Pt 7.7A This Part contains the best interests obligations and restrictions on
conflicted remuneration.
Requirements for the professional standards of persons licensed or authorised to provide personal advice to retail
clients (relevant providers)
Divisions 8A–8C, 9 and 10 of Pt 7.6 These Divisions of Pt 7.6 authorise FASEA to establish education standards,
CPD requirements, professional year requirements for new entrants, a
Code of Ethics and arrangements for code monitoring schemes to monitor
and enforce compliance by relevant providers with the Code of Ethics.
They require ASIC to establish a Register of Relevant Providers and
introduce new restricted terms ‘financial planner’ and ‘financial adviser’.
Source: Hanrahan 2018, p. 27.
4.15
3.2 Key definitions

The regulation of services provided by tax (financial) advisers to consumers comes as something of a
conceptual afterthought in the Australian financial services regulatory framework. The framework
tends to treat the providers of these services as ‘intermediaries’ engaged in sales and distribution of
financial products for, or on behalf of, product issuers to investors. Unravelling the regulatory
obligations that apply to tax (financial) advisers from the regulatory framework is a complex but
necessary exercise in order to understand the regulatory space that the emerging profession of
financial planning and financial advice might seek to occupy.
Financial product
The central term in the framework is ‘financial product’. A number of key definitions depend on the
meaning of this term. As will become clear, the services an ‘intermediary’ provides are largely only
regulated when they are attached to the provision of a financial product to an investor.
Section 761A of the Corporations Act contains the definitions for the purposes of Chapter 7 of the
Act. It includes the following:
financial product has the meaning given by Division 3.
Note: Some references in this Chapter to financial products have effect subject to particular express exclusions
(for example, see ss 1010A and 1074A) or inclusions (see s 1040B).
The note to the definition of financial product warns that in some parts of the Chapter, the term will
include some things that would not ordinarily fit the definition, but are included as financial
products, and some things that would ordinarily fit the definition, but are expressly excluded from
the definition.
To add to the complexity, the definition of ‘financial product’ in the ASIC Act (which includes ASIC’s
consumer protection powers) differs from the Corporations Act definition.
Licensing financial service providers

Section 911A of the Corporations Act generally requires a person who carries on a financial services
business in Australia to hold a financial services licence covering the provision of the service.
Section 911B generally requires that a person must only provide financial services in Australia on
behalf of another person if the second person holds a financial services licence covering the provision
of the service and the first person is duly authorised by the second person to provide the service.
Serious consequences flow from providing financial services in Australia without being either licensed
or authorised by someone who is licensed to provide the particular financial service, or for persons
‘holding out’ or representing that they are licensed or duly authorised to provide a financial service
when they are not. For example, breaching s 911A, 911B or 911C of the Corporations Act is an
offence.
Therefore, understanding the meaning of the term ‘financial service’ is of critical importance in
complying with financial services laws.
4.16
Financial service
The term ‘financial service’ is defined in s 761A:
financial service has the meaning given by Division 4.
Providing a financial service

Section 766A of the Corporations Act generally defines when a person provides a financial service:
(1) For the purposes of this Chapter, subject to paragraph (2)(b), a person provides
a financial service if they:
(a) provide financial product advice (see s766B); or
(b) deal in a financial product (see s 766C); or
(c) make a market for a financial product (see s766D); or
(d) operate a registered scheme; or
(e) provide a custodial or depository service (see s766E); or
(ea) provide a crowd-funding service (see s 766F); or
(f) engage in conduct of a kind prescribed by regulations made for the
purposes of this paragraph.
In this subject, the focus is primarily on when a person provides a financial service by
providing financial product advice in accordance with the meaning of ‘financial product advice’
in s 766B. The meaning of the term ‘dealing’ will also be considered in s 766C.
Financial product advice

Section 761A of the Corporations Act defines ‘financial product advice’ as follows:
financial product advice has the meaning given by s 766B.
Section 766B(1) defines ‘financial product advice’ to mean:
... a recommendation or statement of opinion, or a report of either of those things,
that 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 could reasonably be regarded as intended to have such influence.
In Australian Securities and Investments Commission v Park Trent Properties Group Pty Ltd (No 3)
[2015] NSWC 1527, Sackville AJA considered [at 365]:
The construction of s 766B(l) must take into account that the language encompasses
a recommendation or statement of opinion that is intended to influence a person in
making a decision relating to a financial product or could reasonably be regarded as
having such an influence. A person wishing to influence another person (the client)
to make a decision relating to a financial product ... may do so in ways other than by
express recommendations or explicit statements of opinion. Information or other
material may be presented to the client in a form implying that the presenter favours
or recommends a particular course of action without saying so explicitly. Similarly,
information or other material may be presented in a form that implies that the
presenter’s view is that the contemplated course of action is likely to be beneficial to the
client. The authorities have accepted that the statutory language should be given a
broad interpretation. Specifically, they support the proposition that a person may
provide information or present material in a way that implicitly makes a
recommendation or states an opinion in relation to a financial product.
4.17
Personal advice and general advice

Section 766B distinguishes between providing financial product advice which is personal or general.
A person providing personal financial product advice must provide a statement of advice with the
advice. General advice must be accompanied with a general advice warning.
Personal advice
Personal advice is defined in s 766B(3) as:
(3) For the purposes of this Chapter, personal advice is financial product advice that is
given or directed to a person (including by electronic means) in circumstances
where:
(a) the provider of the advice has considered one or more of the person’s
objectives, financial situation and needs (otherwise than for the purposes
of compliance with the Anti-Money Laundering and Counter-Terrorism
Financing Act 2006 or with regulations, or AML/CTF Rules, under that Act);
or
(b) a reasonable person might expect the provider to have considered one
or more of those matters.
General advice
General advice is financial product advice that is not personal advice (s 766B(4)).
Section 949A sets out the requirements for providing a general advice warning to a retail client.
ASIC’s Regulatory Guide RG 175 ‘Licensing: Financial product advisers—Conduct and disclosure’
includes details of ASIC’s expectations for providing the general advice warning
(see ASIC RG 175.51–RG 175.59).
Retail client
Where the person to whom a financial service is provided is a retail client, various
‘consumer protection’ provisions are triggered in the regulatory framework:
• Part 7.7 (disclosure requirements dealing with the provision of financial services to retail clients)
• Part 7.9 (disclosure requirements dealing with the offer and sale of securities and other financial
products to retail clients)
• Part 7.7A (the best interests and related obligations and remuneration restrictions)
• Divisions 8A–C, 9, and 10 of Part 7.6 (relating to the professional standards of relevant providers,
the Register of Relevant Providers and the use of the restricted terms ‘financial planner’ and
‘financial adviser’).
Section 761A defines retail client as:
retail client has the meaning given by s 761G and 761GA.
4.18
Dealing in or arranging a financial product

It is important to understand the concepts of ‘dealing’ in and ‘arranging’ a financial product because
such activities are closely related to providing financial product advice and a person who deals in or
arranges a financial product is required to be licensed (or authorised by an AFS licensee) to
undertake these activities, with severe consequences for unlicensed and unauthorised conduct.
Dealing
In s 761A:
dealing in a financial product has the meaning given by s 766C (and deal has a
corresponding meaning).
and
arrangement means, subject to s 761B, a contract, agreement, understanding, scheme
or other arrangement (as existing from time to time):
(a) whether formal or informal, or partly formal and partly informal; and
(b) whether written or oral, or partly written and partly oral; and
(c) whether or not enforceable, or intended to be enforceable, by legal proceedings
and whether or not based on legal or equitable rights.
Section 761B provides:
761B Meaning of arrangement—2 or more arrangements that together form a
derivative or other financial product
If:
(a) an arrangement, when considered by itself, does not constitute a derivative,
or some other kind of financial product; and
(b) that arrangement, and one or more other arrangements, if they had instead been
a single arrangement, would have constituted a derivative or other financial
product; and
(c) it is reasonable to assume that the parties to the arrangements regard them as
constituting a single scheme;
The arrangements are, for the purposes of this Part, to be treated as if they together
constituted a single arrangement.
In Chapter 7, conduct constitutes dealing if it involves (s 766C(1) and (2)):
• applying for or acquiring a financial product
• issuing a financial product
• underwriting the securities or interests in managed investment schemes
• varying a financial product
• disposing of a financial product, or
• arranging for a person to do any of these things (unless the actions concerned
amount to providing financial product advice).
Activities which are excluded from ‘dealing’ include:
• providing a crowd-funding service (s 766C(2A))
• undertaking an activity on behalf of government or local government or for a public authority
or instrumentality or agent of the Crown (s 766C(4)), or
• undertaking an activity that meets the clerks and cashiers exemption in s 766A(3).
4.19
It is not dealing in a financial product if the person deals in the product on their own behalf
(whether directly or through an agent or other representative), unless the person is an issuer and the
person is dealing in one or more of issuer’s products (s 766C(3)).
ASIC RG 36.32 ‘Licensing: Financial product advice and dealing’ states that:
Arranging refers to the process by which a person negotiates for, or brings into
effect, a dealing in a financial product (e.g. an issue, variation, disposal, acquisition
or application). The person who is arranging may be acting for a product issuer,
seller or consumer.
ASIC provides a non-exclusive list of conduct that is exempt from the definition of dealing at
RG 36.41.
ASIC states in RG 36.43:
Your conduct may constitute arranging if:
(a) your involvement in the chain of events leading to the relevant dealing is of
sufficient importance that without that involvement the transaction would
probably not take place (e.g. where you are the main or only person consumers
deal directly with in a particular transaction);
(b) your involvement significantly ‘adds value’ for the person for whom you are
acting; and
(c) you receive benefits depending on the decisions made by the person for whom you
are acting.
Note: This is not intended to be an exhaustive list of potentially relevant factors. In determining whether you are arranging,
the presence (or absence) of any one or more of the listed factors is not conclusive.
Australian financial services licensees, their representatives and

providers
As discussed, a person conducting a financial services business in Australia needs to be licensed or be
a representative authorised by an AFS licensee. Several key terms are relevant to understanding
aspects of the licensing regime for financial services providers. Later topics in the course apply these
terms to aid an understanding of key obligations on tax (financial) advisers under the Act. Sections
941B and 946A place the disclosure obligations relating to financial services guides and statements of
advice directly on authorised representatives of licensees.
The following definitions appear in s 761A of the Corporations Act:
financial services licensee means a person who holds an Australian financial services licence.
Australian financial services licence means a licence under s 913B that authorises
a person who carries on a financial services business to provide financial services.
Section 913B requires ASIC to issue a licence to an applicant under that section if:
• they make an application in accordance with s 913A
• ASIC does not think the applicant is likely to breach the conditions of the licence under s 912A
• if the applicant is an individual, ASIC is satisfied there is no reason to believe they are not of good
fame or character, or
• if the applicant is a company or a partnership or a trustee, ASIC is satisfied there is no reason to
believe the responsible officers, partners or trustees are not of good fame or character, or if not
satisfied, the applicants’ ability to provide the financial services covered by the license would
nevertheless not be significantly impaired
• the applicant provides any additional information requested by ASIC relevant to the application
• the applicant meets any other requirements prescribed by regulations.
4.20
Section 912A(1) sets out the general licence obligations that all AFS licensees must comply with:
(1) A financial services licensee must:
(a) do all things necessary to ensure that the financial services covered by the
licence are provided efficiently, honestly and fairly; and
(aa) have in place adequate arrangements for the management of conflicts of
interest that may arise wholly, or partially, in relation to activities undertaken
by the licensee or a representative of the licensee in the provision of financial
services as part of the financial services business of the licensee or the
representative; and
(b) comply with the conditions on the licence; and
(c) comply with the financial services laws; and
(ca) take reasonable steps to ensure that its representatives comply with the
financial services laws; and
(cb) if the licensee is the operator of an Australian passport fund, or a person with
responsibilities in relation to an Australian passport fund, comply with the law
of each host economy for the fund; and
(d) subject to subsection (4)—have available adequate resources
(including financial, technological and human resources) to provide the
financial services covered by the licence and to carry out supervisory
arrangements; and
(e) maintain the competence to provide those financial services; and
(f) ensure that its representatives are adequately trained (including by complying
with s 921D), and are competent, to provide those financial services; and
(g) if those financial services are provided to persons as retail clients:
(i) have a dispute resolution system complying with subsection (2); and
(ii) give ASIC the information specified in any instrument under
subsection (2A); and
(h) subject to subsection (5)—have adequate risk management systems; and
(j) comply with any other obligations that are prescribed by regulations made for
the purposes of this paragraph.
Section 912A(2) requires the licensee’s dispute resolution system to include internal and external
dispute resolution through membership of the Australian Financial Complaints Authority (AFCA)
external dispute resolution scheme.
Section 910A contains definitions that apply to Part 7.6 of the Corporations Act:
representative of a person means:
(a) if the person is a financial services licensee:
(i) an authorised representative of the licensee; or
(ii) an employee or director of the licensee; or
(iii) an employee or director of a related body corporate of the licensee; or
(iv) any other person acting on behalf of the licensee; or
(b) in any other case:
(i) an employee or director of the person; or
(ii) an employee or director of a related body corporate of the person; or
(iii) any other person acting on behalf of the person.
4.21
relevant provider: a person is a relevant provider if the person:

(a) is an individual; and
(b) is:
(i) a financial services licensee; or
(ii) an authorised representative of a financial services licensee; or
(iii) an employee or director of a financial services licensee; or
(iv) an employee or director of a related body corporate of a financial services
licensee; and
(c) is authorised to provide personal advice to retail clients, as the licensee or on
behalf of the licensee, in relation to relevant financial products.
Note: For rules about when relevant providers can use the expressions ‘financial adviser’ and ‘financial planner’, see section 923C.
relevant financial products mean financial products other than:

(a) basic banking products; or
(b) general insurance products; or
(c) consumer credit insurance; or
(d) a combination of any of those products.
class of product advice means financial product advice about a class of products,
but does not include a recommendation about a specific product in the class.
Representatives
Section 911B in Part 7.6 sets out the circumstances in which a representative may provide financial
services on behalf of an AFS licensee. The effect is that, usually, a director or employee of a licensee
or related body corporate of a licensee does not need to be separately authorised to provide
financial services on behalf of the licensee.
Section 9 of the Corporations Act defines ‘related body corporate’ as:
related body corporate, in relation to a body corporate, means a body corporate that
is related to the first-mentioned body corporate by virtue of s 50.
Section 50 provides:
Where a body corporate is:
(a) a holding company of another body corporate; or
(b) a subsidiary of another body corporate; or
(c) a subsidiary of a holding company of another body corporate;
the first-mentioned body and the other body are related to each other.
Authorised representatives
Sections 916A(1) and 916B(3) provide that a licensee may appoint authorised representatives to
provide a specified financial service or financial services on behalf of the licensee by giving written
notice. The specified financial services may be all or only some of the services the licensee is licensed
to provide (ss 916A(2) and 916B(4)).
The licensee or authoriser may revoke the authorisation at any time by giving notice in writing to the
authorised representative (ss 916A(4) and 916B(7)).
4.22
The licensee may authorise:

• Individuals;
• Bodies corporate;
• Partnerships; or
• A group of individuals and/or bodies corporate that are the trustees of a trust (but
not the trust itself).
(ASIC 2016)
Any authorised representative of an AFS licensee may appoint or ‘sub-authorise’ individuals to

provide financial services on behalf of the licensee, as long as the licensee consents to the
appointment. This will generally be necessary where a body corporate is an authorised
representative and requires its directors and employees to be able to provide financial services
on behalf of its authorising licensee (ASIC 2016).
Licensees are required to notify ASIC of the appointments of authorised representatives within
15 business days of the appointment (s 916F (1)).
An individual may be the authorised representative of more than one licensee, provided each
licensee consents to the authorisation (s 916B).
Providers and providing entities

Division 2 of Part 7.7A of the Corporations Act concerns the best interests and related obligations.
These obligations generally apply to the individual providing the personal advice rather than directly
to the licensee. Section 961 states:
(1) This Division applies in relation to the provision of personal advice (the advice) to a
person (the client) as a retail client.
(2) The individual who is to provide the advice is referred to in this Division as
the provider.
(3) If two or more individuals are to provide the advice, each of those individuals is
referred to in this Division as the provider.
(4) An individual is a provider for the purposes of this Division even if the individual is
a representative of a financial services licensee and is to provide the advice on
behalf of that licensee.
(5) If it is not reasonably possible to identify the individual who is to, or individuals
who are to, provide the advice, the person who is to provide the advice is
the provider for the purposes of this Division.
(6) A person who offers personal advice through a computer program is taken to be
the person who is to provide the advice, and is the provider for the purposes of
this Division.
In contrast, the obligations in Part 7.7, which relate to financial services disclosure to retail clients,
apply to the providing entity, that is, to the licensee or authorised representative that provides the
financial product advice (see ss 941A, 941B and 946A, and ASIC RG 244 ‘Giving information, general
advice and scaled advice’ at RG 244.51).
Nevertheless, a financial services licensee must take reasonable steps to ensure its representatives
comply with ss 961B, 961G, 961H and 961J and the licensee contravenes s 961K if its representative
other than authorised representative (e.g. its employee representative) contravenes those sections
(see s 961L and RG 244.52).
4.23
4 Participants’ roles, obligations and rights

This section discusses the roles, obligations and rights of the main participants in the financial
services system. It focuses on the obligations imposed on all financial services providers.
4.1 Federal government

It is the role of the federal government, at this highest level, to determine the nature of the
Australian financial services system and the role it will play in the Australian economy through
laws and other means (e.g. funding). The discussion later in this topic of some of the overseas
financial services systems highlights that there are many different models to choose from.
Federal law, rather than state law, primarily regulates the financial services industry. The federal
government brings before the federal parliament the over-reaching legislation which provides the
general framework of the financial services system. Once passed by the parliament, this legislation is
complemented by delegated legislation that fills out the details of how the legislation is to operate
in practice.
As well as introducing legislation, the federal government establishes and resources the regulatory
authorities that must implement and administer the legislation. The government is ultimately
responsible for the performance of these regulatory authorities.
4.2 Courts
The courts interpret the laws that are passed by parliaments and determine the legal rights and
obligations of parties who appear before them. In determining the rights of these parties, they are
also establishing interpretations that will apply in other similar cases. The doctrine of ‘precedent’
means a single interpretation eventually emerges.
The courts also make law in areas where there is no (or little) legislation. There is a body of court
decisions stretching back over the centuries, in English common laws, which forms the law on
subjects such as contracts. The courts alter this law to take account of changing circumstances
in society and business. In this way, the law remains flexible.
4.3 Regulatory authorities

The regulatory authorities supervise the operation of the financial services system and seek to
ensure participants act legally. In all cases, the regulatory authorities’ preferred method is to educate
and provide guidance on how to comply with the law. However, if there are breaches, the authorities
have very strong enforcement powers. The main regulatory authorities, discussed in detail in Topic 5,
are the:
• Australian Securities and Investments Commission (ASIC)
• Australian Prudential Regulation Authority (APRA)
• Reserve Bank of Australia (RBA)
• Australian Competition and Consumer Commission (ACCC)
• Australian Transaction Reports and Analysis Centre (AUSTRAC).
4.24
Markets, such as those operated by Australian Securities Exchange Limited (ASX, ASX 24),
Chi-X, National Stock Exchange of Australia (NSX and SIM VSE), FEX Global (SIM VSE), Sydney Stock
Exchange Ltd (SSX – formerly the Asia Pacific Stock Exchange (APX)) and IMB Share Market (IMB),
also play an important role in ensuring their participants (stockbrokers) comply with the market
operating rules.
4.4 Financial services providers

Financial services providers must obtain authorisation or a licence to provide financial services.
Who are financial services providers?

The term ‘financial services provider’ is used in this course to describe an organisation or person who
provides financial services for which an authorisation is required. Generally, the term refers to:
• licensees — the holder of an AFS licence (e.g. a corporation, trustee, partnership or natural
person)
• representatives —include authorised representatives or representatives, employees or other
persons acting on behalf of a licensee.
Examples of financial services providers include:
• stockbrokers
• futures brokers
• insurance brokers
• financial advisers / tax (financial) advisers
• fund managers
• banks
• general and life insurance companies.
AFS licences are granted by ASIC if it has no reason to believe the applicant will not comply with its
licence obligations, which include meeting requirements as to financial capacity, educational and
training qualifications, experience and good character (see s 913B, Corporations Act).
Restricted terms
A person is prohibited from using certain terms unless the person’s licence, or the licence
under which the person operates as a representative, provides for the use of those terms
(see s 923B, Corporations Act). These terms include:
• stockbroker
• sharebroker
• insurance broker
• insurance broking
• general insurance broker
• life insurance broker
• financial adviser
• financial planner
• any other word or expression (whether in English or another language) that is of importance
to the words or expressions above.
4.25
Role of financial services providers

Former ASIC Chairman Mr Jeffrey Lucy’s 2006 speech titled ‘The financial advice industry in Australia:
The regulator’s perspective’, provided a succinct overview of the significant responsibility entrusted
to financial services providers. The speech referred to the trust placed in the advice industry, as well
as pointing to adviser responsibilities and community expectations that would be critically examined
by the Royal Commission 12 years later:
There is no doubt that a snapshot of the financial advice industry would reveal that the
industry as a whole, and the network of financial advisers in it, contributes significantly
to Australia’s economy.
As an industry, you have responsibilities that will impact on providing for the financial
future and wellbeing of many Australians. Individually, you are in a position to influence
the wealth management and savings profiles of your clients.
As financial advisers, you are also in a significant position of trust with your clients.
You are privy to their circumstances, needs and aspirations. You must utilise that
knowledge, coupled with product knowledge, to provide relevant and responsible
financial advice.
Public confidence in Australia’s capital markets is materially affected by your acceptance
of your legal responsibilities, and meeting your clients’ reasonable expectations.
(Lucy 2006)
Duties, obligations and rights

A financial services provider must have an AFS licence (s 911A, Corporations Act). The obligations of a
licensee (set out in s 912A(1) of the Corporations Act) include:
• doing all things necessary to ensure that the financial services covered by the licence are provided
efficiently, honestly and fairly
• having adequate arrangements for the management of conflicts of interest
• complying with the licence conditions
• complying with financial services laws
• taking reasonable steps to ensure that representatives comply with financial services laws
• having adequate resources available
• maintaining competence to provide financial services
• ensuring that representatives are adequately trained and competent
• having a dispute resolution system for retail clients
• having adequate risk management systems
• having professional indemnity insurance for retail clients.
The obligations of a licensee are discussed in detail in Topic 6.
There are also substantial disclosure requirements, which are discussed in detail in Topic 7.
4.26
Contractual obligations
Virtually every transaction that takes place in the provision of financial services involves a contract.
For an agreement to be an enforceable contract, it must contain all of the following elements:
• Agreement — offer and acceptance: there must be an agreement consisting of an offer by
one party and acceptance of that offer by the other party.
• Consideration: The contract must either be in the form of a document under seal (e.g. a deed)
or there must be a reciprocity of promises made by the parties (i.e. a mutual trading of benefits
and detriments).
• Intention to create legal relations: the agreement must have been reached with the intention
of creating a legal relationship and must, by its character, be capable of doing so.
• Capacity to contract: The participating parties must have the legal capacity to enter into the
contract.
• Lawfulness of object: in some cases, a contract may not be enforced if it is prohibited by statute
or contrary to public policy.
• Genuine consent: there must be no duress, undue influence, fraud or unconscionability by, or on
the part of, the parties to the contract.
A financial services provider must comply with contractual obligations or a number of remedies are
available to the other party.
A contractual relationship common to financial services providers is that of principal and agent.
A contract of agency is formed when one person (the agent) is given authority to act on behalf
of another person (the principal). This means the agent is given authority to bring the principal into
binding contractual relations with third parties.
Example: Contractual relationships

Stanley, acting as an agent for Bailey, enters into a contract with Marples.
Two contracts are involved:
• the contract of agency between Stanley and Bailey which enables Stanley to bring
Bailey into contractual relations with Marples
• the contract between Bailey and Marples.
The contract of agency is formed by agreement between the principal and the agent. The agreement
can be expressed (orally or in writing) or implied (unstated but taken for granted). No formality
is necessary.
Courts have recognised that often the usages and customs of the market in which the agent is
instructed to deal are implied into the contract between the principal and agent, unless expressly
excluded. For customs and usages to be implied into a contract of agency, they must satisfy the
following criteria:
• be universally known by the persons dealing in the market (i.e. be notorious)
• the nature of the custom or usage must be precise and clear (i.e. certain)
• the application of the terms must give a fair result to the parties bound by them (i.e. reasonable).
Example: Implied terms

Before the introduction of confirmation of transactions, the contract note was an
example of a custom and usage in the stockbroking context that provided a substantive
source of implied terms.
4.27
Duty to use due skill, care and diligence

Topic 3 provided an introduction to tort law and the tort of negligence, which is the most relevant
to financial services providers. These topics are discussed in more detail in Topic 10.
The case law establishes that a financial services provider that holds itself out as having special skills
and expertise can be liable in negligence where a client relies on the provider’s advice. A financial
services provider is required to use due skill, care and diligence in carrying on its business,
demonstrating the level of competence usual among financial services providers.
In practice, the courts have imposed high standards of integrity and competence on financial services
providers in determining the standard of care owed to clients.
A client who wishes to bring an action for negligence against a financial services provider must
establish each of the following elements of the tort:
• a duty to take reasonable care owed at the time of the negligent act or omission by the provider
to the client
• a breach of that duty by the provider
• damage resulting to the client from that breach that is not too remote.
A financial services provider also has a statutory duty under s 961B of the Corporations Act to act in
the best interests of the client when providing advice. To satisfy this requirement a provider must:
 identify the objectives, financial situation and needs of the client that are disclosed to the
provider by the client
 identify the subject matter of the advice sought and the objectives, financial situation and needs
of the client that would reasonably be considered as relevant to that subject matter
 make reasonable inquiries to obtain complete and accurate information where it is reasonably
apparent that the information on the client’s circumstances is incomplete
 assess whether the provider has the expertise required to provide the advice (and if not,
decline to provide advice)
 conduct a reasonable investigation into the financial products that might be relevant to the
client’s objectives and needs
 base all judgments on the client’s relevant circumstances
 take any other steps that would reasonably be regarded as being in the client’s best interests,
given their circumstances.
This duty was introduced on 1 July 2012 as part of the Future of Financial Advice (FOFA) reforms.
It is a codification and restatement of a financial adviser’s fiduciary duty to act in the best interests
of the client and replaced the previous statutory duty under s 945A to have a reasonable basis for
the advice. The requirement to have a reasonable basis for advice has not disappeared completely,
however. The steps outlined in the ‘safe harbour’ test in section 961B(2), which will enable a tax
(financial) adviser to safely demonstrate compliance with the best interests duty in section 961B(1),
collectively amount to the enquiries needed to develop a reasonable basis for any advice provided.
4.28
Fiduciary relationship duties — conflict of interest

The law of equity is a judge-made law developed by the Court of Chancery in England to provide
fairness and flexibility to some of the principles that were developed by the common law courts.
One of the concepts developed by equity is the fiduciary relationship.
The nature of the fiduciary obligation is encapsulated in the following remarks of Millett LJ in
Bristol and West Building Society v Mothew (1998) Ch 1 [at 18]:
The distinguishing obligation of a fiduciary is the obligation of loyalty. The principal is
entitled to the single-minded loyalty of his fiduciary. This core liability has several facets.
A fiduciary must act in good faith; he must not make a profit out of his trust; he must not
place himself in a position where his duty and his interest may conflict; he may not act
for his own benefit or the benefit of a third person without the informed consent of his
principal.
The courts have recognised certain classes of persons as falling within established categories
of fiduciary relationships, for example solicitor and client, and trustee and beneficiary.
Apart from these established categories, a fiduciary relationship is taken to exist where a person has
undertaken to act in the interests of another and not in their own interests.
A fiduciary relationship arises between a financial adviser and their client where the adviser holds
themselves out as an expert on financial matters and undertakes to perform a financial advisory
role for the client (see Daly v The Sydney Stock Exchange Limited (1986) 160 CLR 371 and
Aequitas v Sparad No 100 Limited (formerly Australian European Finance Corporation Limited) (2001)
19 ACLC 1006.
A person may be in a fiduciary relationship as to some aspects of the relationship but not others.
Example: Fiduciary relationship

A bank that gives its customers financial advice in the course of a transaction that
includes an advance of money to the client may be in a fiduciary relationship with the
client in its role as adviser.
The bank may be expected to act in its own interests in ensuring the security for the
loan, but it will undertake fiduciary obligations to the client if it creates an expectation
that it will advise in the customer’s interests on the wisdom of the investment
(see Commonwealth Bank of Australia v Smith (1993) 42 FCR 390 at 391).
The subject matter over which the fiduciary obligation extends is determined by the nature of the
undertaking. This will be ascertained by the terms of the agreement between the parties and the
course of dealings between the parties.
Can fiduciary obligations be excluded by agreement between the adviser and

client?
In ASIC v Citigroup Global Markets Australia Pty Limited (No 4) [2007] FCA 963, the terms of a letter
of engagement, under which an investment bank was retained by a large public company to advise
on a proposed takeover, excluded the existence of any fiduciary relationship between the investment
bank and its client. The Federal Court decided the exclusion was legally effective. The court held that
the law does not prevent an investment bank from contracting out of, or modifying, any fiduciary
relations.
It is important to be aware that this case does not apply to situations where the relationship is with a
retail client. The legislated best interests duty cannot be contracted out of by the parties.
4.29
The fiduciary duty in relation to managing a conflict of interest finds expression in s 912A(1)(aa) of the
Corporations Act, which requires appropriate measures to be taken for the management of conflicts of
interest.
A potential conflict of interest may be enough to lead to a transaction being set aside without
needing to show the financial services provider’s judgment was actually affected by it. The provider
must make a full disclosure of any interest in the transaction and then the ultimate decision to
continue rests with the client. The provider must disclose full particulars of any information of the
kind set out below that might reasonably be expected to, or have been, capable of influencing the
provider in the giving of advice:
 information about any remuneration (including commission) or other benefits the provider
(including its related bodies and employees) is to receive
 any association or relationships between the provider (or any of its associates) and any issuers
of the financial products recommended.
Example: Conflicts of interest and fiduciary duty

Examples of conflicts of interest and the corresponding duty in the financial services
provider–client relationship are set out below:
• Provider receives commission paid on a recommended product.
Conflict — the provider is receiving a commission for a product that it is
recommended. The client believes the provider is recommending the product
because it is the most appropriate for the client when the reason may be because
it gives the provider the commission.
Duty — the provider must not receive commissions or remuneration that would
influence the advice.
• Provider owns shares in a company and intends to continue to hold them and
recommends the client buy shares in that company.
Conflict — it is in the provider’s interest to recommend the purchase of shares in a
company in which the provider also has shares.
Duty — the provider must disclose the nature of its holding to the client if the
holding could reasonably be expected to influence the provider in making the
recommendations so the client knows the provider may have a conflict of interest.
Fiduciary relationship duties — separate client accounts

A financial services provider who receives money from a client for a purpose other than to pay for
the provider’s services holds that money in a fiduciary capacity. The money is acknowledged to
belong to the client and not the provider. Any such money held by the provider cannot be used for
any purpose other than that for which it was provided. Therefore, that money is not available to be
used to satisfy a provider’s creditors in the event of its insolvency.
A financial services provider must keep a client’s property (including money and other property,
e.g. securities) separate from its own property. The provider must keep proper accounting records
to enable identification of the client’s property and to accurately account for all of the client’s money
that comes into the provider’s possession.
These fiduciary obligations are embodied in Divisions 2 and 3 of Part 7.8 of the Corporations Act,
which deal with how a licensee is required to handle client money and other property.
4.30
Fiduciary relationship duties — confidentiality

The fiduciary relationship imposes a duty on a financial services provider to keep the affairs of its
clients confidential. For example, it would be a breach of the duty for a provider to disclose that a
client had placed a particular order to buy shares. This duty is overridden where the provider is
bound by the law to disclose information concerning the client’s affairs, for example to ASIC.
Code of Ethics
The Corporations Amendment (Professional Standards of Financial Advisers) Act 2017 (Cth)
amended the Corporations Act, and arguably further extends the reach of legislation into
previously unregulated activities by introducing values and ethical standards for advisers under the
Financial Planners and Advisers Code of Ethics 2019 (Code of Ethics).
The Code is a legislative instrument made by the Financial Advisers Standards and Ethics Authority
(FASEA), and compliance with the Code is mandated by section 921E. As such, it has the force of law.
Although ethics on the whole is concerned with doing that which is right, the pathway to an ethical
outcome is not always clear, and there has been disquiet in the industry about how the Code of
Ethics operates in a practical sense. The Code of Ethics to some extent reaches beyond the
limitations of statute law to regulate individual financial adviser behaviour, and also hints at duties
that are beyond the client relationship (in Standard 6, for example).
FASEA has offered some guidance to interpreting the Code of Ethics through its Explanatory
Statement to the Financial Planners and Advisers Code of Ethics 2019 Legislative Instrument, and on
18 October 2019 released a FASEA Code of Ethics Guidance paper, and a subsequent document on
20 December 2019 to provide further clarification on the intent of the Code. A third guidance
document was released for consultation on 5 October 2020.
However, as the Code of Ethics only came into effect from 1 January 2020, and as at October 2020
there is no disciplinary body overseeing advisers’ compliance with the Code, the consequences of
Code breaches are yet to be fully explored.
Industry body codes

ASIC has the power under s 1101A of the Corporations Act to approve financial services industry
codes on application of the body that administers that code. ASIC has issued RG 183 ‘Approval of
financial services sector codes of conduct’, which sets out a checklist for approval of the code,
including requirements such as:
 the code is not inconsistent with the law
 the code is enforceable by the body against members who hold out that they comply with it
 a consultative process for code development
 a mandatory three-year review of code.
ASIC has approved very few codes pursuant to s 1101A, with the highest profile being the most
recent Codes of Banking Practice, including the presently in-force Code, and the Financial Planning
Association of Australia’s Professional Ongoing Fees Code in 2016.
Even if ASIC approval is not sought for a code, financial services providers who are members of
industry bodies will be required to comply with the codes and guidelines by virtue of the terms of
their membership.
4.31
The following industry codes are in widespread use:

 Code of Banking Practice (2020): <www.ausbanking.org.au/campaigns/new-banking-code>
 Customer Owned Banking Code of Practice (2018):
<www.customerownedbanking.asn.au/consumers/cobcop>
 ePayments Code, regulated by ASIC (2011):
<https://asic.gov.au/regulatory-resources/financial-services/epayments-code>
 General Insurance Code of Practice (2014) (GICOP): <http://codeofpractice.com.au> —
a replacement GICOP is scheduled to come into force on 1 July 2021
 Insurance Brokers Code of Practice (2014): <www.niba.com.au/html/code-of-practice.cfm>
 Life Insurance Code of Practice (2017): <www.fsc.org.au/policy/life-insurance/code-of-practice>.
A number of individual industry peak bodies have released codes or standards to be complied
with by their members. These include:
 Australian Banking Association Professional Standards, notably the Conduct Background Check
Protocol (2017): <www.ausbanking.org.au/policy/earning-back-trust/professional-standards>
 Financial Planning Association’s Code of Professional Practice (2013):
<https://fpa.com.au/professionalism/fpa-code-of-professional-practice>
 Financial Services Council Standards’ Code of Ethics & Code of Conduct (2020):
<https://www.fsc.org.au/resources/1999-standard-1-from-14-april-2020/file>
 Australian Institute of Company Directors Code of Conduct (2005):
<http://aicd.companydirectors.com.au/-/media/cd2/global-resources/about/pdf/code-of-
conduct-september-2005.ashx>
 Australian Financial Markets Association Code of Conduct and Ethical Principles (2015):
<https://afma.com.au/code-of-conduct>.
4.5 Compliance
Every organisation should have procedures in place to ensure that it complies with the law and
to encourage a culture of compliance with the law among members of the organisation.
Why have a culture of compliance? Firstly, it is a requirement of good corporate governance and risk
management. The ASX Corporate Governance Principles and Recommendations (4th edn, 2019)
defines corporate governance as ‘the framework of rules, relationships, systems and processes
within and by which authority is exercised and controlled within corporations’. Principle 7 states:
A listed entity should establish a sound risk management framework and periodically
review the effectiveness of that framework.
Secondly, there is the business benefit that an organisation with a compliance culture is more likely to:
 attract better staff
 have higher staff morale
 increase likelihood of identifying legal and other risks to the company
 have fewer difficulties (and less time spent on) dealing with regulators
 be seen in a better light by its stakeholders — customers, creditors, suppliers and the broader
community in which the organisation operates, therefore guarding its most valuable asset,
its reputation.
4.32
Thirdly, there is a growing trend in the law to take account of whether companies have a compliance
culture in determining liability and penalty. Three examples demonstrate this trend:
 The federal Criminal Code, which generally applies to Corporations Act offences, provides in
s 12.3(1) that, in certain circumstances, fault must be attributed to a corporation that authorised
or permitted the commission of an offence. Section 12.3(2) then goes on to provide that the
means by which this authorisation or permission may be established include:
(c) proving that a corporate culture existed within the body corporate that directed,
encouraged, tolerated or led to non-compliance with the relevant provision;
or proving that the body corporate failed to create and maintain a corporate
culture that required compliance with the relevant provision.
 In ASIC v Citigroup Global Markets Australia Pty Limited (No 4) [2007] FCA 963, the Federal Court
considered whether a company’s Chinese walls arrangements were adequate as a defence to
insider trading. The court said [at 454] that:
Adequate arrangements require more than a raft of written policies and procedures.
They require a thorough understanding of the procedures by all employees and a
willingness and ability to apply them to a host of possible conflicts.
The courts have long taken into account compliance issues in determining penalties for trade
practices matters. In Trade Practices Commission v CSR (1991) ATPR 41–076, French J listed a number
of factors to be taken into account in determining a penalty, including:
Whether the company has a corporate culture conducive to compliance with the Act,
as evidenced by educational programs and disciplinary or other corrective measures in
response to an acknowledged contravention.
In Ali v Hartley Poynton Ltd (2002) VSC 113, emphasis was placed on the need for compliance and
monitoring of the behaviour of employees or representatives. The full details and a short summary
of the case are available in the resources below.
‘Further resources 1 and 2’ in KapLearn.

1. Broadly, what is the role of the following three (3) main participants in the financial
services system in Australia?
(a) parliament
(b) courts
(c) regulatory authorities.
2. List five (5) obligations and duties of financial services providers under the
Corporations Act.
3. What compliance issues were raised by Ali v Hartley Poynton Ltd (2002) VSC 113?
4.33
5 Regulatory reform and current issues

The financial services industry is dynamic and therefore ongoing reform characterises the industry.
It is hoped that a consistent and targeted focus on financial services reform and more effective
monitoring of existing regulation will ensure only necessary regulation is introduced.
Drivers of significant change currently impacting the financial services industry include:
• implementation of the three-year Life Insurance Framework transition from 1 January 2018
(Corporations Amendment (Life Insurance Remuneration Arrangements) Act 2017 (Cth))
• raising education, training and ethical standards of financial advisers and tax (financial) advisers
from 1 January 2019 (Corporations Amendment (Professional Standards of Financial Advisers) Act
2017 (Cth))
• implementing recommendations flowing from the Royal Commission into Misconduct in the
Banking, Superannuation and Financial Services Industry (Financial Sector Reform (Hayne Royal
Commission Response—Protecting Consumers (2019 Measures)) Act 2020 (Cth) and Financial
Sector Reform (Hayne Royal Commission Response—Stronger Regulators (2019 Measures)) Act
2020 (Cth)).
Key issues of focus are:
• improving the quality of advice to retail clients and reinforcing disclosure, conflict of interests and
best interests duty obligations
• increasing consumer confidence in the professionalism and ethical conduct of financial planners
and advisers
• identifying financial services entity conduct that falls short of community expectations and its
causes (e.g. culture, governance, risk management and remuneration practices).
5.1 Key reviews and developments within the financial services

industry
At any one time, there may be a number of reviews and inquiries being conducted into the financial
services industry. These reviews and inquiries are generally conducted at the request of an
incumbent government, though parliamentary joint committees are formed by members from both
sides of politics. The policies of Australia’s major political parties, and sometimes the interests of
smaller parties and independent politicians, can cause significant shifts in the regulatory landscape.
These shifts are sometimes realised through the government’s response to inquiries into aspects of
the financial system. Below are a number of major inquiries that have presented their findings in
recent years.
4.34
The Harmer Pension Review (2008–2009)

In February 2009, the government released the Pension Review Report following a review —
the Harmer Pension Review — which was designed to look at measures affecting those in retirement
and those on various pensions with a view to strengthen the financial security of seniors, carers and
people with disabilities. The report was completed by Dr Jeff Harmer and resulted in the
government’s Secure and Sustainable Pensions package being announced in the 2009–10 Budget.
The key element of the Harmer Pension Review was pension reform. The following
recommendations were made:
• Single full rate pensioners should be a priority for reform. The existing single rate of pension does
not adequately recognise the costs for those wholly reliant on the pension to support themselves.
• The relativity of the rate of pension for singles to that of couples is too low and should be in the
64–67% range.
• The payment of existing supplements and allowances could be simplified by integrating them into
either a pension supplement or the base rate.
• Pension payments should be tied to changes in the actual cost of living faced by pensioners.
• There is scope to target pension increases to those who have little or no private means.
The review reported its findings that the basic structure of Australia’s pension system, with its focus
on poverty alleviation, indexation to community living standards and prices, and means testing,
was sound. However, it faced challenges in both the short and long term and reforms were needed.
Pensioners who receive the Age Pension, Disability Support Pension, Carer Payment, Veterans’
Affairs Service Pension, Income Support Supplement, War Widow/Widower’s Pension,
Bereavement Allowance, Wife Pension and Widow B Pension were expected to benefit from the
pension reform. Under the new arrangements, the rates of payment were increased as follows:
• $32.49 a week for single pensioners on the full rate of pension
• $10.14 a week for pensioner couples (combined) on the full rate of pension.
This brought the single rate of pension up to two-thirds of the combined couple rate.
From 20 September 2009, the maximum assistance for single pensioners increased from around
$304.19 per week to $336.68 per week, and for pensioner couples (combined) from around
$497.36 each per week to $507.50 each per week. These pension rates are indexed annually.
With pension and energy supplements, the maximum fortnightly pension as at September 2020 is
$944.30 for single pensioners and $711.80 per person for pensioner couples.
4.35
The Ripoll Inquiry (2009)

In the wake of collapses such as Storm Financial and Opes Prime, the government set up the
Parliamentary Joint Committee on Corporations and Financial Services in February 2009, headed by
Bernie Ripoll. The Parliamentary Joint Committee (PJC) Inquiry into Financial Products and Services in
Australia (Ripoll Inquiry) tabled its recommendations on financial products and services in parliament
in November 2009. It made the following 11 recommendations (Parliament of Australia 2009,
pp. 150–151):
1. the Corporations Act be amended to explicitly include a fiduciary duty for financial advisers.
The inclusion of a statutory fiduciary duty will require financial advisers to place their clients’
interests ahead of their own
2. the government to ensure ASIC is appropriately resourced to perform effective risk-based
surveillance of advice provided by financial advisers, including conducting financial advice
shadow-shopping exercises
3. the Corporations Act be amended to require financial advisers to disclose more prominently
in marketing material, restrictions on the advice they are able to provide and any potential
conflicts of interest
4. the government to consult with and support the industry in developing the most appropriate
mechanism to cease payments from product manufacturers to financial advisers
5. the government to consider the implications of making the cost of financial advice tax
deductible
6. the Corporations Act be amended to provide extended powers for ASIC to ban individuals from
the financial services industry
7. that ASIC require agribusiness-managed investment scheme licensees, as part of their
AFS licence, to satisfy conditions that demonstrate they have sufficient working capital to meet
their current obligations
8. the Corporations Act be amended to allow ASIC to deny an application or suspend or cancel
an AFS licence where there is a reasonable belief the licensee may not comply with their
obligations under their AFS licence
9. ASIC to consult the financial services industry on the establishment of an independent
industry-based professional standards board to oversee nomenclature, competency and
conduct standards for financial advisers
10. the government to investigate the costs and benefits of different models of a statutory
last-resort compensation fund for investors
11. ASIC to develop and deliver more effective education activities targeted at individuals likely
to be seeking financial advice for the first time.
The government’s April 2010 response to the Ripoll Inquiry was in the form of the Future Of Financial
Advice (FOFA) information pack, addressing most of the recommendations and, in particular, the key
reform areas of:
• banning conflicted remuneration
• introducing a statutory fiduciary duty requiring financial advisers to act in the best interests of
their clients
• introducing an adviser charging regime, including flexible options for consumers when paying for
financial advice.
The FOFA is discussed in greater detail below.
4.36
The Henry Review (2008–2010)

In May 2010, the government released the long-awaited Australia’s Future Tax System Review.
This review provided numerous recommendations for further taxation reform in Australia,
including the recommendation that efforts to raise government revenue should be focused on four
efficient tax bases — personal income, business income, private consumption expenditure,
and economic rents from natural resources and land (CPA 2015). The recommendations also sought
to address the challenges facing the Australian economy by increasing the simplicity and efficiency
of Australia’s tax system, which would in turn underpin productivity increases, and strong and
sustainable economic growth. The goods and services tax (GST) was specifically excluded from the
review.
Some of the issues considered were:
3.1 the appropriate balance between taxation of the returns from work,
investment and savings, consumption (excluding the GST) and the role
to be played by environmental taxes;
3.2 improvements to the tax and transfer payment system for individuals and working
families, including those for retirees;
3.3 enhancing the taxation of savings, assets and investments, including the role and
structure of company taxation;
3.4 enhancing the taxation arrangements on consumption (including excise taxes),
property (including housing), and other forms of taxation collected primarily by
the States;
3.5 simplifying the tax system, including consideration of appropriate administrative
arrangements across the Australian Federation; and
3.6 the interrelationships between these systems as well as the proposed emissions
trading system [ETS].
(The Treasury n.d.)
In all, there were 138 recommendations made by the Henry Review, but only a small number
were specifically accepted or rejected by the government of the day (Challenger 2010, p. 1).
The Henry Review was therefore largely consigned to a platform for further tax debate.
Based on the review, the following measures were selectively proposed in the 2010/11 Budget,
many of which were abandoned, deferred or changed in later budgets:
• Superannuation guarantee (SG) contributions are to rise progressively to 12% by 2020, starting
with a 0.25% increase in 2013/14.
The contribution rate at the time of the Henry Review was 9% and this was first increased by a
0.25% increase in 2013/14. In 2014/15 the contribution rate rose by 0.25% to 9.5%. The next
scheduled increase of 0.5%, which will take the rate to 10%, is to be applied from 1 July 2021.
Annual 0.5% increases in the contribution rate from 2022 onwards will result in the 12%
contribution rate being reached in 2025.
• The SG age is to be increased from 70 to 75, effective July 2013. The upper age limit has now been
removed, effective 1 July 2013.
• Effective 1 July 2012, low-income earners earning up to $37,000 will get a government
contribution of up to $500 to offset superannuation contributions tax.
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• Effective July 2012, the higher concessional contribution cap of $50,000 p.a. will be retained for
workers over age 50 if their total superannuation balance is less than $500,000.
Implementation of this measure was subsequently deferred to 1 July 2014 and then
withdrawn in the 2013/14 Budget. From 1 July 2013, the concessional contribution limit was
$35,000 unindexed for those aged over 60. For individuals under 60, the concessional
contributions cap will remain fixed at $25,000 up to and including the 2013/14 financial year.
For the 2015/16 tax year, the concessional contribution cap was $35,000 for persons turning
50 years or older in the tax year or $30,000 for persons aged under 50. From 2017/18,
the concessional contribution cap became $25,000 for all persons, regardless of age.
• A resources superannuation profit tax of 30% (reduced from the original proposed 40% and
subsequently renamed the ‘Minerals Resource Rent Tax’) to apply to big miners’ profits was
introduced from 1 July 2013. Only profits over $75 million were subject to the tax. Revenue from
the tax was well below projections and the coalition government, which took power in 2013,
successfully repealed the tax in 2014.
• The company tax rate will be reduced progressively to 28% (from the current 30%) by 2014/15
with small businesses to benefit earlier in 2012/13.
This measure was subsequently abandoned. On 8 May 2012, the government announced it would
not be proceeding with the measure to lower the company tax rate from the 2013/14 income
year, nor would it implement an early start to the company tax rate cut for small businesses from
the 2012/13 income year. However, there was a reduction in the small business income tax rate in
2015/16 to 28.5%. For the purposes of determining the rate of tax payable, a ‘small business’ is
defined as a company with an aggregated annual turnover of $2 million or less. For the 2016/17
income year, the small business tax rate was lowered to 27.5% and applied to small businesses
with both an aggregated turnover of less than $10 million and those carrying on a business for all
or part of the year. From the 2017/18 income year, a base rate entity test applies.
• Capital allowance concessions for small businesses will be expanded effective July 2012
by allowing immediate write-offs for assets under $5,000 (subsequently increased to $6,500)
and a single depreciation pool for other assets at a rate of 30%.
• Tax concessions of 40% on interest earned on savings will be available; this measure was
not implemented.
• Work-related deductions will be replaced by a standard deduction rate to simplify lodgements for
individual personal tax returns; this measure was not implemented.
Other key reforms recommended by the Henry Review, but which the government decided against,
were:
• increasing the personal tax-free threshold to $25,000; the threshold was increased but only to
$18,200, starting July 2012
• introducing a flat tax rate for all individuals (35% to $180,000 and 45% thereafter)
• introducing tax exemptions for income support and supplementary payments
• simplifying tax offsets and their application.
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The Cooper Review (2009–2010)

The review into the governance, efficiency, structure and operation of Australia’s superannuation
system (the Cooper Review) began in May 2009.
The Cooper Review delivered its final report to the government in June 2010. The key reforms
recommended are summarised below (Australian Government 2010):
• A new default fund called ‘MySuper’, offering a single diversified investment strategy, intra-fund
advice, opt-out insurance and a simple pension option, would be available to all employees as a
low-cost basic product.
• A ‘choice’ product to allow more complex options for engaged members would be available.
• Commissions on insurance premiums (including group and personal) would be removed.
• A series of measures to improve back-office procedures, called ‘SuperStream’, would be
introduced which would use members’ tax file numbers as their key identifier.
Self-managed superannuation funds (SMSFs) were exempt from any major changes under the
review.
The key objective of MySuper was to deliver value for money for members. By focusing the trustee’s
obligations on net returns, MySuper was expected to put downward pressure on fees and deliver
higher retirement incomes for members. MySuper was estimated to reduce the total fees paid by
superannuation fund members by around $550 million per year in the short term, rising to around
$1.7 billion per year over the long term. For a 30-year-old worker on average weekly earnings,
MySuper, in conjunction with SuperStream, could result in an extra $40,000, or 7%, in retirement
savings (with around 80% of this increase attributable to MySuper). MySuper was implemented
in 2014.
APRA’s report on superannuation statistics for the June 2020 quarter reported that there were
$731 billion of assets in MySuper products, a 3.3% decrease from June 2019. Comparably, there were
$733.1 billion of assets in SMSFs (down 2.1% from $749.1 billion over the same period). The total
superannuation asset pool was slightly over $2.864 trillion in June 2020, down 0.6% from
$2.88 trillion in 2019.
The COVID-19 pandemic has had a measurable impact on these figures, however. One of the
measures introduced by the government to assist Australians during the COVID-19 pandemic is the
COVID-19 Superannuation Early Release Scheme, which as at 5 July 2020 had made payments of
$19.1 billion to applicants; by 11 October 2020 a total of $34.3 billion had been released.
Looking at the performance of MySuper in 2017–18, around 4 years after its introduction,
the Productivity Commission undertook a review of the competitiveness and efficiency of the
Australian superannuation system, releasing its final report, Superannuation: Assessing Efficiency and
Competitiveness — Inquiry Report on 10 January 2019 (Productivity Commission 2019).
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In relation to MySuper, the report noted significant dispersion in the performance of MySuper
products, which could leave members in poorly performing products significantly worse off over the
course of their membership (p. 11):
• in the 11 years to 2018, 32 MySuper products (of 51 in the sample) performed above
their tailored benchmark, and generated a median net return of 5.5 per cent a year.
Nearly 10 million member accounts and $440 billion in assets were in these products,
almost all of which were associated with not-for-profit funds (of varying sizes)
• over the same period, 21 products performed below their tailored benchmark, of
which 17 underperformed by more than 0.25 percentage points and generated a
median net return of 3.8 per cent a year for their members. These 17
underperforming products contain about 1.6 million member accounts and $57 billion
in assets. They comprise 10 products from retail funds, 6 from industry funds,
and 1 from a public sector fund. And over a third (7) are life-cycle products –
where members are automatically moved into less risky and lower-return asset
allocations as they age.
The implications of these differences in investment performance for an individual member were
illustrated in Figure 1 below.
Figure 1 MySuper returns
Source: Productivity Commission 2019, p. 13.
In its ‘Recommendation 4’ (p. 67), the Productivity Commission recommends the

Australian Government legislate to allow APRA to apply a MySuper outcomes test, requiring funds to:
• obtain independent verification — to an audit-level standard — of their outcomes test
assessment, comparison against other products in the market, and determination of
whether members’ best interests are being promoted, at least every three years
• report to APRA annually on how many of their MySuper members switched to a
higher-fee choice product within the same fund.
It recommends that failure to meet these conditions should result in the fund’s MySuper
authorisation being revoked. The government implemented these recommendations in its 2020–21
Budget, under the Your Super, Your Future package of reforms.
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The Financial System Inquiry (2013–2014)

Following the change of government in 2013, a new inquiry into the financial system was
commissioned with the view to examine how the financial system could be positioned to best meet
Australia’s evolving needs and support Australia’s growth. The inquiry was to be known as the
‘Financial System Inquiry’ (FSI) and was chaired by David Murray, AO, former CEO of the
Commonwealth Bank.
The FSI’s final report was released on 7 December 2014 and made 44 recommendations across
five major topic ‘themes’ (The Treasury 2014):
1. strengthening the economy by making the financial system more resilient (resilience)
2. lifting the value of superannuation system and retirement incomes (superannuation and
retirement incomes)
3. driving economic growth and productivity through settings that promote innovation (innovation)
4. enhancing confidence and trust by creating an environment in which financial firms treat
customers fairly (consumer outcomes)
5. enhancing regulator independence and accountability, and minimising the need for future
regulation (regulatory system).
The FSI promised a ‘root and branch’ review of the financial system and delivered recommendations
on a wide range of issues, from comprehensive consumer credit reporting to mortgage risk weighting
and bank capital levels. The government responded thoroughly to the FSI on 20 October 2015
(The Treasury 2015a), explicitly or tacitly agreeing with 43 of the 44 recommendations, committing
to either legislative reform or tasking various agencies and committees with investigating and
implementing the suggested measures. The government rejected only Recommendation 8,
which sought to prohibit limited recourse borrowing arrangements by superannuation funds.
While some of the recommendations touch on high-level regulatory policy issues, a number of
recommendations have a direct impact on the financial advice space. The government’s summary
response to the FSI states the following about the key themes of ‘superannuation and retirement
incomes’ and ‘consumer outcomes’:
Superannuation & Retirement Incomes — Superannuation is the largest financial
asset many Australians have after the family home. It is critical that the
superannuation system is competitive, efficient and transparent and has the highest
standards of governance in order to provide Australians with the confidence to invest
in the system and plan for their retirement.
We will enshrine the objective of the superannuation system in legislation.
We will immediately task the Productivity Commission to develop efficiency metrics
for the superannuation system and develop alternative models for allocating default
contributions.
We have already committed to improve governance in superannuation by requiring
a minimum one-third of independent directors for superannuation trustee boards,
enhancing transparency of information and improving competition in
superannuation. We will also improve retirement income products by removing
impediments to their development.
Consumer Outcomes — While consumers are responsible for the consequences
of their financial decisions, they should be treated fairly. However, recent history
provides a number of examples where commercial interests have overridden
consumer interests, to the detriment of consumers.
We will do more to lift the standards of financial advice, including by introducing
minimum professional, ethical and education standards.
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We will consult widely on measures to improve the accountability of issuers and

distributors of financial products. We will also consult on a new ASIC product
intervention power that would be used to modify products, or if necessary ban the
sale of harmful products. We will ensure remuneration structures in life insurance,
stockbroking and mortgage broking do not adversely affect the quality of advice
consumers receive.
(Australian Government 2015)
Further, the government committed to reconstituting the Financial Sector Advisory Council (FSAC)
to include a role in monitoring the performance of financial regulators. This was in lieu of establishing
a new Financial Regulator Assessment Board, as suggested in Recommendation 27. In November 2016,
new members were appointed to the FSAC, chaired by Michael Cameron, Managing Director and
Group Chief Executive Officer of Suncorp Group, with the support of eight other members.
Through Recommendation 25, the FSI recommended in broad terms that the government ‘raise the
competency of financial advice providers and introduce an enhanced register of advisers’. In the
Inquiry’s view, the minimum standard for those advising on Tier 1 products is a tertiary degree,
as well as competency in specialised areas and ongoing professional development. The work that has
been undertaken by the government and various agencies on reforming this aspect of the financial
services industry is discussed in section 5.2 below.
Future of Financial Advice (FOFA) (2010-2012)

Following the original announcement of the FOFA reforms in April 2010, on 28 April 2011 the
government provided further details of its reform package. The reforms were guided by
two principles:
• financial advice must be in the client’s best interests — distortions to remuneration,
which misalign the best interests of the client and the adviser, should be minimised;
and
• in minimising these distortions, financial advice should not be put out of reach of
those who would benefit from it.
In launching the FOFA reforms in 2010, the then Minister for Financial Services, Superannuation and
Corporate Law, the Hon Chris Bowen MP, stated:
The reforms also significantly expand the availability of low-cost, simple advice
(known as intra-fund advice) for consumers, including areas such as transition to
retirement and the nomination of beneficiaries. There will be a review of whether
other measures are needed to clarify whether simple advice can be provided in a
compliant matter outside intra-fund advice.
(Bowen 2010)
In 2012, the Corporations Amendment (Future of Financial Advice Measures) Act 2012 (Cth) and the
Corporations Amendment (Further Future of Financial Advice Measures) Act 2012 (Cth) were passed
by parliament, which introduced the FOFA reforms into law on 1 July 2012. ASIC provided a year’s
grace period for those affected, taking a ‘facilitative approach’ until 1 July 2013, when full
compliance was expected.
The key reforms are summarised in Table 3.
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Table 3 FOFA — key reforms

Reform Desired outcome Implementation
Best interests • Financial advice given to Australians must be in • Introduction of a best interests statutory duty
fiduciary duty the best interests of the client and ahead of subject to a ‘reasonable steps’ qualification
the financial adviser’s interests. • Two-yearly opt-in
• ASIC powers extended.
Removal of • Clients will be given the opportunity to choose • Banning of conflicted remuneration structures
conflicted and agree on fees upfront. (e.g. upfront and trailing commissions and soft
remuneration dollar benefits in excess of $300).
Volume-related • Targeted at removing payments that have • Removes incentive to recommend usage of a
payments similar conflicts to product provider’s set particular platform.
remuneration, such as commissions and
scale/volume benefits.
Scalable advice • Advice does not have to be comprehensive • Measured against what is reasonable in the
and could be tailored, thereby reducing the circumstances and commensurate and scalable
cost to the client. to the client’s needs.
Planner • Provides training and capability development. • Ensures planners understand their clients,
capability products and services and can be successful in
the new environment.
Source: Deloitte 2011.
Three reforms will be discussed in greater detail: the best interests duty, scaled advice and the ban
on conflict remuneration.
Best interests duty

Under the FOFA reforms, the ‘best interests’ obligation applies to all advice from 1 July 2013.
This replaces ss 945A and 945B of the Corporations Act, the ‘know your client’ and ‘know your
product’ rules (also known as the ‘suitability rule’).
The best interests obligation is intended to ensure advice that is provided to a client leaves the client
in a better position than they were before the advice was provided. The obligation relates specifically
to personal advice provided to retail clients. ASIC explains the ‘best interests duty’ in RG 175
‘Licensing: Financial product advisers—Conduct and disclosure’.
It is ASIC’s view that this best interest can be ‘scaled up’ or ‘scaled down’ based on the client’s stated
needs and objectives such that, even if advice is limited in scope, it must still be shown to be in the
client’s best interests.
Safe harbour for complying with the best interests duty

The Corporations Act provides a safe harbour for tax (financial) advisers in meeting the best interests
obligation, whereby they can assume they are acting in the client’s best interests if they can show
that they have met all the obligations under s 961B(2). An advice provider must determine what the
client’s objectives, financial situation and needs are based on the information that has been disclosed
to them by the client to whom they are to provide advice. There is also a broad catch-all provision in
s 961B(2)(g), which requires the adviser to take ‘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’.
An advice provider is also required to identify the subject matter of the advice sought by the client
(whether explicitly or implicitly). This is relevant to determining the scope of the advice.
ASIC’s RG 175 provides considerable detail regarding the application of safe harbour and the
identification of client information.
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Modified best interests duty

The legislation sets out circumstances in which a financial adviser does not have to satisfy every
element of s 961B(2) to have acted in the client’s best interests. In particular, this applies when an
adviser is providing advice to the client about basic banking products, general insurance products,
consumer credit insurance, or any combination of these products. The advice provider satisfies the
best interests duty in s 961B(1) if they take the steps in
s 961B(2)(a)–(c) of the Corporations Act.
Providing scaled advice

One of the key objectives of the FOFA reforms is to improve access to good quality advice by
facilitating scaled advice. The ability to provide scaled advice is in part a recognition that clients are
increasingly ‘expressing a preference for piece-by-piece advice rather than holistic or comprehensive
advice’ as per RG 244.6 ‘Giving information, general advice and scaled advice’ (ASIC 2012)). As ASIC
indicates, scaled advice at its most basic or most comprehensive is still governed by the same rules
and advisers are still held to the same standards (RG 244, Table 1); the quality of the advice is not
scaled, only the level of detail or scope. For more information on scaled advice, see s D of RG 244.
Ban on conflicted remuneration

Conflicted remuneration is defined in s 963A of the Corporations Act as:
• any monetary or non-monetary benefit
• given to a financial services licensee or a representative who provides financial product advice
to retail clients
• that, because of the nature of the benefit or the circumstances in which it is given,
could reasonably be expected to influence:
– the choice of financial product recommended, or
– the financial product advice given.
Volume-based benefits, that is, benefits which are payable to licensees or representatives dependent
on the total value or number of products sold or recommended, are also considered to be conflicted
remuneration (s 963L). Employers and product sellers are prohibited from giving licensees and their
representatives conflicted remuneration
(ss 963J and 963K).
While the onus is on the licensee to take ‘reasonable steps’ to ensure that representatives do not
accept conflicted remuneration (s 963F), an authorised representative also has a responsibility not
to accept conflict remuneration (s 963G).
Breaching the conflicted remuneration prohibition may result in civil penalties up to $200,000 for
a person and $1 million for a company, per s 963E (licensees and representatives) or s 963G
(authorised representatives).
There are certain exemptions to the prohibition for advice given to clients on general or life risk
insurance products and a limited number of other financial and non-financial benefits prescribed
by the regulations.
ASIC provides guidance on conflicted remuneration in RG 246 ‘Conflicted and other banned
remuneration’.
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FOFA developments
Following the change in government in 2013, an election promise to ‘reduce compliance costs
and regulatory burden on the financial services sector’ saw a number of changes announced in
June 2014. These changes included removing the ‘catch-all’ in s 961B, safe harbour, and the
requirement for clients to ‘opt-in’ every two years by re-signing contracts with their adviser.
While the legislation passed the House of Representatives, and thus commenced on 1 July 2014,
the Senate disallowed the changes on 19 November 2014, thus reversing the government’s changes.
It is clear from actions taken by ASIC against both licensees and authorised representatives that
compliance with the FOFA reforms (particularly best interests duty) is now expected.
‘Required reading 1’ in KapLearn.

The reading provides further details on the background and implementation of the FOFA
reforms. Other relevant government reforms related to FOFA can also be found on the ASIC
website.
Royal Commission into Misconduct in the Banking,

Superannuation and Financial Services Industry (2017–2019)
The Banking Royal Commission, led by Commissioner Kenneth Hayne QC, was established in
December 2017 to investigate whether the conduct of financial services entities had failed to meet
community standards. These areas included banking services, financial advice, consumer and small to
medium-enterprise lending, and regional and remote community financial services.
The Commissioner, assisted by multiple senior barristers, conducted seven rounds of public hearings
across eight months and multiple Australian venues. Six of the seven rounds concerned particular
industry issues while the seventh focused on policy questions that arose from the preceding hearings.
Commissioner Hayne submitted his Interim Report to the federal government on 30 September
2018, and the Final Report on 1 February 2019 (Attorney-General’s Department 2019). The federal
government released the report to the public on 4 February 2019.
The Royal Commission received a total of 10,323 submissions in relation to the matters covered,
of which 9% related to financial advice. Banking submissions totalled 61% of the submissions,
however.
Commissioner Hayne did not discriminate between industry sectors when observing that the
misconduct uncovered during the hearings was motivated by self-interest, either by the individual
for self-gain or acting to satisfy the needs of a corporation within a sales and profit-driven culture.
In relation to financial advice, Commissioner Hayne also looked at vertical integration between banks
and advice and sales arms, as well as various industry scandals (including ‘fee for no service’ issues
which arose with major licensees).
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Recommendations for financial advice

The Final Report set out 76 recommendations for the whole banking and financial services sector,
with 10 recommendations directed specifically at financial advice and practice standards.
These recommendations are paraphrased below:
1. The law should be amended to require annual renewal of ongoing fee agreements,
recording the services to be provided and preventing deduction of fees from clients’ accounts
without services.
2. If the adviser is not independent, impartial and unbiased (words that are restricted under
s 923A(5) of the Corporations Act), an explanation should be given to the client by identifying
that the adviser has an association or relationship with product issuers.
3. A review of the effectiveness of measures intended to improve standards of advice should
be undertaken three years after implementation, including reviewing whether the FOFA
‘safe harbour’ for advisers should be repealed.
4. Grandfathering provisions for conflicted commissions being paid to advisers should be repealed.
5. A reduction in the cap on commissions for life risk insurance products should be considered
during ASIC’s review.
6. Consideration should be given to lifting the exemption of the ban on conflicted remuneration
for insurance products and the exemption for non-monetary benefits in s 963C.
7. All AFS licence holders should be required to adopt the reference-checking and information-
sharing protocol, as provided by the Australian Banking Association.
8. AFS licence holders should be required to report serious compliance concerns about individual
advisers to ASIC on a quarterly basis.
9. AFS licence holders should take steps to investigate detected misconduct by an adviser,
and notify and remediate the affected clients promptly.
10. A new disciplinary system should be established requiring advisers of retail clients to be
individually registered and for a single, central disciplinary body to be created to hear concerns
from clients, AFS licence holders and other stakeholders.
The federal government committed to following through with all 76 recommendations and
proclaimed it would go further in some instances. This included the 10 recommendations outlined
above. It is noted, however, that some of these measures were already under review prior to the
Banking Royal Commission (Attorney-General’s Department 2019). Additionally, recommendations
such as 2.10 (recommendation for a new disciplinary system) are overlaid on existing systems, or
subtly strengthen existing regulation, such as Recommendation 4.11, which requires financial firms
to cooperate with the Australian Financial Complaints Authority (AFCA), when by and large they do
so already.
Some measures were introduced by the government during 2019 and early 2020, with the balance
planned for a progressive roll out with milestones at 30 June 2020 and ‘end-2020’ (The Treasury
2019, Appendix A). The key measures which were implemented in 2019 and early 2020 include:
• A legislated best interests duty requiring mortgage brokers to act in their clients’ best interests,
which was passed on 17 January 2020 (Recommendation 1.2)
• Grandfathered commissions for financial advisers ending 1 January 2021, which was passed on
14 October 2019 (Recommendation 2.4)
• Removal of exemption for funeral expenses policies from the financial product regime, which was
passed on 17 February 2020, and came into force on 1 April 2020 (Recommendation 4.2)
(discussed in greater detail below)
• Legislation applying unfair contract terms provisions to insurance contracts was passed on
17 February 2020, and applies to insurance contracts from 5 April 2021 onwards
(Recommendation 4.7)
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The disruption caused by the COVID-19 pandemic has resulted in measures intended to be
implemented by 30 June 2020 and end-2020 being pushed back by six months (Doran 2020;
Frydenberg 2020).
Importantly, changes such as a single disciplinary body for financial planners and advisers will not
come into force until mid-2021 (Recommendation 2.10). The requirement for financial planners and
advisers to disclose a lack of independence (Recommendation 2.2) and the inclusion of insurance
claims handling into the financial services regime (Recommendation 4.8) were to be introduced by
30 June 2020, but will be implemented at the earliest in December 2020.
Case study: Funeral expenses facilities reform

One of the bases for Commissioner Hayne’s recommendations was the protection of vulnerable
persons through reform to exemptions previously given to a range of products of an inherently
financial nature. One of these products is a funeral expenses facility, being a scheme or arrangement
in which a person pays a premium, or makes a deposit, to cover funeral expenses after their death.
At face value, this may appear to be a prudent means to ensure that bereaved relatives do not have
to incur significant financial funeral costs, but the reality is that the products would, in some
instances, cost more than the funeral costs being saved for. Further, unregulated sales tactics meant
that the products are being sold to Indigenous persons who were vulnerable to pressure selling
tactics, and in many cases do not have sufficient income to afford the products. ASIC and its
predecessor regulators have been litigating against a prominent funeral expenses facility product
provider since 1992, with new proceedings being filed as recently as 29 October 2020.
With these issues in mind, Commissioner Hayne recommended that the exemptions under the
Corporations Act under section 765A(1) and Corporations Regulations 7.1.07D be lifted in order for
funeral expenses policies to be deemed financial products. This necessitates promotion of the
products only by those people who are authorised to do so under an AFS licence, requires a
Product Disclosure Statement for the products, and also brings them within the consumer
protections afforded by the financial product regime under the ASIC Act.
On 1 April 2020, the Treasury Laws Amendment (Financial Services Improved Consumer Protection)
(Funeral Expenses Facilities) Regulations 2019, and the Financial Sector Reform (Hayne Royal
Commission Response – Protecting Consumers (2019 Measures)) Act 2020 came into force,
lifting these long-standing exemptions. There are grandfathered arrangements for existing products
until 1 January 2021, meaning that those products are still exempt from the regime until then, but all
persons selling funeral expenses facilities products from 1 April 2020 onwards must meet the
regulatory obligations.
5.2 Financial adviser education standards

In 2009, the Ripoll Report found that licensees’ minimum training standards for advisers —
under RG 146 ‘Licensing: Training of financial product advisers’ — were too low, particularly given
the complexity of many financial products. ASIC subsequently conducted industry consultations and
issued two consultation papers on the subject of financial adviser education standards — CP 153
and CP 212.
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Consultation Paper 153 (April 2011)

ASIC released CP 153 in April 2011 (ASIC 2011) and proposed amending the assessment and
professional development framework for financial advisers by requiring:
• all new financial advisers who provide Tier 1 financial advice to pass a financial adviser
competency certification exam to ensure they have the requisite competencies to perform
their role (entry stage)
• all new financial advisers following entry stage to be supervised by a supervisor (who has at least
five years’ experience in the industry) for a minimum period of one year full-time or equivalent
• all new and existing financial advisers to undertake a knowledge update review every three years
on changes to laws, market issues and new products
• ongoing continuing professional development requirements.
The key point is that CP 153 changes were intended to apply to all financial advisers who provide not
only personal but also general advice to retail clients. The changes were designed to generate greater
consumer confidence in financial advisers who have passed a national exam, which would provide
a benchmark for the necessary skills, knowledge and competence required in the provision of advice.
Consultation Paper 212 (September 2013)

In September 2013, ASIC released CP 212 ‘Licensing: Training of financial product advisers —
Updates to RG 146’.
ASIC’s reasons for a review of training standards were stated in CP 212 as follows:
12. We are proposing that the training standards in RG 146 be revised and improved
to more accurately reflect the knowledge and skills required for advisers to provide
quality financial product advice.
13. This is not a new proposal. In our submission to the Parliamentary Joint Committee
on Corporations and Financial Services (PJC) for its Inquiry into Financial Products
and Services in Australia (PJC Inquiry) in 2009, we noted our intention to raise the
training standards (subject to consultation) as part of our forward program to
further reduce risks for retail investors. We subsequently conducted two
consultations, in 2009 and 2010, to ascertain industry’s views of RG 146 and
whether the training, assessment and professional development regime needed to
be improved: see Consultation Paper 153 Licensing: Assessment and professional
development framework for financial advisers (CP 153), paragraphs 41 and 52.
14 . Our view that the training standards in RG 146 need to be revised and improved is
informed by:
(a) the findings of the PJC Inquiry, as set out in the Inquiry into financial
products and services in Australia, November 2009 (Ripoll Report);
(b) the results of the industry consultation in 2009 and 2010 (documented in
CP 153);
(c) our surveillance activity, including our recent shadow shop detailed in
Report 279 Shadow shopping study of retirement advice (REP 279); and
(d) our commissioned Cognitive Task Analysis (CTA) research.
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In overview, ASIC’s proposal to update RG 146 and lift training requirements was split into
three progressive stages or ‘regimes’:
• Regime A — incorporates the current training regime in RG 146 and applies to advisers who do
not intend to change their advice activities. Under Regime A, the generic and specialist topics of
RG 146 do not change, and the minimum training requirements for an adviser providing personal
advice remains at AQF Level 5 (Diploma equivalent) for Tier 1 products and AQF Level 3
(Certificate III equivalent) for Tier 2 products.
• Regime B — the proposed regime for advisers who commence providing product advice between
1 January 2015 and 31 December 2018 or for those under Regime A who change their advice
activities in that period. Regime B was to make all generic knowledge requirements for Tier 1
advisers mandatory as well as expanding the generic knowledge requirements and providing
additional specialist knowledge areas. The minimum educational level for an adviser providing
personal advice is AQF Level 6 (Advanced Diploma equivalent) for Tier 1 products and AQF Level 4
(Certificate IV equivalent) for Tier 2 products.
• Regime C — the proposed regime for advisers who commence providing product advice after
1 January 2019 or for those under Regimes A or B who change their advice activities from that
date onwards. The generic and specialist knowledge requirements would remain the same as
those under Regime B. The minimum educational level for an adviser providing personal advice
is increased to AQF Level 7 (Bachelor’s Degree equivalent) for Tier 1 products and AQF Level 5
(Diploma equivalent) for Tier 2 products.
The overall impact of these proposed changes would be to lengthen the period of study for
those entering the financial advice industry and to broaden the knowledge base under RG 146.
Further, ASIC’s intent was for this regime change to run parallel to the financial adviser test proposed
in CP 153.
Inquiry into proposals to lift the professional, ethical and education

standards in the financial services industry (December 2014)
The Parliamentary Joint Committee on Corporations and Financial Services also inquired
into proposals to ‘lift the professional, ethical and education standards’ in the industry
(Parliament of Australia 2014).
The Inquiry outlined the body of work that came before it that was concerned with the interaction
between financial services providers and consumers, and the standards of advice and its education,
dating back to the 1991 Martin Committee’s views on the impact of financial deregulation through
the Ripoll Inquiry, FOFA, and ASIC’s CPs, all the way up to the FSI’s 2014 recommendations
(Parliament of Australia 2014, pp. 3–15).
Having made its inquiries, and with the benefit of this historical information, the Inquiry made
14 recommendations. Those with practical relevance to advisers are:
Recommendation 7 — The committee recommends that:
• the mandatory minimum educational standard for financial advisers should be
increased to a degree qualification at Australian Qualification Framework level seven;
and
• a Finance Professionals’ Education Council should set the core and sector specific
requirements for Australian Qualifications Framework level seven courses.
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Recommendation 8 — The committee recommends that ASIC should only list a financial
adviser on the register when they have:
• satisfactorily completed a structured professional year and passed the assessed
components; and
• passed a registration exam set by the Finance Professionals’ Education Council
administered by an independent invigilator.
Recommendation 9 — The committee recommends that the government require
mandatory ongoing professional development for financial advisers that:
• is set by their professional association in accordance with Professional Standards
Councils requirements; and
• achieves a level of cross industry standardisation recommended by the
Finance Professionals’ Education Council.
Recommendation 10 — The committee recommends that the professional associations
establish an independent Finance Professionals’ Education Council that:
• is controlled and funded by professional associations which have been approved by
the Professional Standards Councils;
• comprises a representative from each professional association (which has been
approved by the Professional Standards Councils), an agreed number of academics,
at least one consumer advocate, preferably two who represent different sectors and
an ethicist;
• receives advice from ASIC about local and international trends and best practices to
inform ongoing curriculum review;
• sets curriculum requirements at the Australian Qualifications Framework level seven
standard for core subjects and sector specific subjects (e.g. Self-Managed
Superannuation Fund services, financial advice, insurance/risk or markets);
• develops a standardised framework and standard for the graduate professional year
to be administered by professional associations;
• develops and administers through an external, independent invigilator a registration
exam at the end of the professional year; and
• establishes and maintains the professional pathway for financial advisers including
recognised prior learning provisions and continuing professional development.
Recommendation 11 — The committee recommends that professional associations
representing individuals in the financial services industry be required to establish codes
of ethics that are compliant with the requirements of a Professional Standards Scheme
and that are approved by the Professional Standards Council.
(Parliament of Australia 2014)
Following the release of the Inquiry, the government published a consultation paper in March 2015
seeking views on the Inquiry’s recommendations, excluding those duplicated by the FSI
(The Treasury 2015b). The draft legislation was released on 3 December 2015 for consultation.
In November 2016, legislation was introduced into parliament to mandate professional standards
for financial advisers and received Royal Assent on 22 February 2017. The Corporations
Amendment (Professional Standards of Financial Advisers) Act 2017 (Cth) includes:
• compulsory education requirements for both new and existing financial advisers
• supervision requirements for new advisers
• a code of ethics for the industry
• an examination that will represent a common benchmark across the industry
• an ongoing professional development component.
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The Financial Adviser Standards and Ethics Authority (FASEA) was declared as a standards body under
the Corporations Act and was established in April 2017 to ‘set the education, training and ethical
standards of licensed financial advisers in Australia’. It is responsible for:
• approving degrees or higher or equivalent qualifications and determining the bridging course
requirements for existing advisers
• approving foreign qualifications
• approving and/or administering the exam
• selecting an appropriate common term for provisional providers
• determining the continuous professional development (CPD) requirements in relation to
licensees’ CPD years
• determining the requirements for the professional year
• setting the Code of Ethics.
As outlined in Topic 6, the new professional standards regime commenced on 1 January 2019.
The new requirements for financial advisers are set out in Table 4.
Table 4 Professional standards for financial advisers

Start date for new relevant providers Start date for existing relevant providers
(authorised on or after (authorised between
Requirement 1 January 2019) 1 January 2016 and 1 January 2019)
Have a relevant bachelor’s or 1 January 2019 Complete by 1 January 2026
higher degree, or equivalent
qualification
Pass the exam 1 January 2019 Complete by 1 January 2022
Complete a professional year 1 January 2019 n.a.
Comply with CPD requirements 1 January 2019 1 January 2019
Comply with the Code of Ethics 1 January 2020 1 January 2020
Be covered by a compliance 1 January 2020 1 January 2020
scheme# (Compliance scheme notifications to be (Compliance scheme notifications to be
received from 15 November 2019) received from 15 November 2019)
Source: ASIC 2018.
# On 11 October 2019, the government announced that it would no longer be proceeding with Code Monitoring Bodies and ASIC have
since granted relief from the requirement to notify by 15 November. Compliance will be undertaken by the new central disciplinary body
to be established pursuant to Royal Commission Recommendation 2.10. In the interim, compliance with the Code will be monitored by
licensees.
During 2018, FASEA undertook industry and stakeholder consultation on its draft standards and
proposed guidance for adviser education pathways, the industry exam and the Code of Ethics,
releasing finalised standards progressively.
The Corporations Act empowers FASEA to create legislative instruments to set standards, such as the
Financial Planners and Advisers Code of Ethics 2019, and the Corporations (Relevant Providers Exam
Standards) Determination 2019. These standards were passed in February 2019, although it has
taken longer to finalise the education pathways.
The timetable for obtaining a bachelor’s degree or equivalent, and undertaking the professional
exam, was extended by changes made to the Corporations Act by the Treasury Laws Amendment
(2019 Measures No. 3) Act 2020. These changes provided tax (financial) advisers with an additional
2 years to obtain a bachelor’s degree or equivalent qualification, and an additional 12 months to pass
the FASEA exam.
Even though the standards are now finalised, licensees and financial advisers should regularly check
the FASEA website for regulatory updates and further guidance.
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The development of the various standards by FASEA is aimed at increasing the education standards,
ethics and professionalism of financial advisers. The key to developments in this area is the
development of a Code of Ethics as well as mandatory compliance with the Code. FASEA has
produced an infographic (see Figure 2 below) of the interplay between the standards in building
towards a safer and more trusted profession for consumers.
Figure 2 Professional Standards Framework
Source: FASEA n.d.(b).
6 Impact of ongoing reforms

The ongoing reforms in financial services aim to increase efficiencies, encourage savings and
investments, and address the retirement savings gap. However, it is important to note that the cost
of regulation directly affects investors because a significant portion of the cost is passed on to the
investor.
This is an important consideration, as access to advice is often frustrated by the cost, or perceived
cost, of receiving financial advice. In 2010, ASIC released Report 224 titled ‘Access to financial advice
in Australia’. In its report, it was noted that the average cost of advice at that time was between
$2,500 and $3,500, which is ‘considerably more than the average $301 that consumers are prepared
to pay to receive advice’ (ASIC 2010, at 186). In 2020, the Financial Planning Association of Australia
indicated that according to its research, the average cost of advice was $2,700, but it also flagged
that the ‘cost of operating a financial planning practice is significant’ and that regulatory and
compliance costs rose each year, as well as professional indemnity insurance costs ‘skyrocketing’
(AdviserVoice 2020).
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In 2006, the Investment and Financial Services Association (IFSA) — the Financial Services Council’s
(FSC’s) predecessor — estimated that the cost to companies to comply with the financial service
industry regulation is about 10% to 15% of total operational costs.
During the 2014 consultation process for the FSI, the inquiry commissioned Ernst & Young (EY) to
investigate the costs, and cost effectiveness, of three specific measures:
• Reforms to the presentation of credit card terms and conditions — EY estimated the total
implementation costs to be between $40 million and $120 million across the industry.
• Know your client (KYC) requirements under the Anti-Money Laundering and Counter-Terrorism
Financing Act 2006 (Cth) — EY found the implementation cost for these measures was between
$647 million and $1 billion, and between $299 million and $435 million in annual ongoing costs.
• Three-day balance transfer requirement as part of SuperStream — EY’s inquiry found the cost to
industry of this measure was between $560 million and $1.2 billion (Ernst & Young 2014).
While there is a high level of imprecision in these figures, they do highlight that the cost of meeting
even a single regulatory change can be exorbitant in sheer dollar terms. It is also worth noting that
the Australian Government estimates the implementation cost of forthcoming changes to adviser
training and education standards to be $165 million (The Treasury 2015c, p. 46).
Further, Thomson Reuters’s Annual Cost of Compliance Survey, taken worldwide but including
Australian compliance professionals, indicated the base cost of compliance staff increases year to
year; compliance staff face other issues as well, such as ‘regulatory fatigue and overload’ and
disproportionate board time being taken up with regulatory matters (Thomson Reuters 2015).
Given the rate of change, and complexities of the legislation, it is inevitable there will be significant
costs of implementation and operation. The recent controversies regarding actual and alleged
misconduct by licensees and financial services entities, and poor or inappropriate provision of
financial advice and products, have reinforced the impact of organisational culture, governance and
risk management frameworks, and remuneration practices.
The financial services industry in Australia has experienced significant change/reform in the last
couple of decades. Addressing the issues facing the industry as they arise will ensure Australia’s
reputation for sound corporate governance and market and industry integrity and efficiency is
maintained to the benefit of the industry, investors and the economy as a whole.
Reflect on this: Impacts on the industry

What future impacts do you expect will arise from the regulatory changes
discussed above?
Consider the impact of these changes in regulation from either an adviser’s or client’s
perspective.
6.1 Impact and cost of FOFA

Many people in the industry welcomed the reforms and the industry broadly agreed that higher
standards should improve transparency and professionalism, ultimately resulting in better outcomes
for both advisers and their clients.
The reforms were designed to promote better quality advice, reduce fees for consumers and reduce
the number of ‘rogue’ advisers in the industry.
However, critics of the reforms maintain that none of these will be achieved.
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Critics believe that all FOFA will do is add administrative and other costs which will eventually be
passed on to the clients, making advice even more inaccessible than before.
For many clients, for instance, fee-for-service arrangements for comprehensive advice
will simply be beyond their means.
(Deloitte 2011)
Costs of implementation
There was considerable discussion about the costs of implementing the FOFA reforms, and included
such observations as:
• In the 2012 mid-year financials, AMP estimated the full, one-off implementation cost to be
between $60 and $75 million after tax to implement the necessary business changes resulting
from FOFA, Stronger Super and other regulatory reforms.
• BT Financial Group reported that the transition has cost tens of millions of dollars and tens
of thousands of hours in adviser training.
Critics argued that though the government and industry funds made the collapse of Storm Financial
an exemplar of the failings of the financial planning community and justification for the FOFA
changes, the changes — if they had been in place already — would not have prevented the
high-profile collapses of Storm Financial or Trio/Astarra.
The industry argued that clients’ best interests have always been at the heart of good financial advice
and the majority of financial advisers have always acted ethically and with integrity in providing
advice to clients. A few ‘rogue’ advisers do not represent the majority in the industry. It is surely
common sense that the provision of ‘quality advice’ should leave the client in a better — and not a
worse — position, which aligns to the test under FOFA’s best interests duty.
Another point to note is that although commissions cannot be paid on any new advice arrangements,
this does not apply to arrangements already in place prior to FOFA; they just have to be disclosed
annually. However, following admissions during the Banking Royal Commission that financial
planning clients had been charged for advice they never received, several financial services
organisations have announced they will ban ‘grandfathered’ sales commissions (Letts 2018).
It is important to note that although both government and media have focused on financial advisers
in relation to the reforms, there are in fact three other groups the FOFA reforms apply to:
• financial services licensees who provide advice to retail clients (through their representatives)
• financial product issuers, for example fund managers and insurers
• regulated superannuation funds.
Some flow-on effects to licensees have become apparent. In the last couple of years, there has been
a significant increase in the consolidation and concentration activity in the industry as many groups
found their business models incapable of coping with increased costs combined with net outflows.
The flow-on effect also reached asset managers, with a number of groups being forced to close
their doors.
It was predicted that increased concentration and consolidation would be likely to continue, leading
to less choice for investors. As noted by Deloitte (2011), ‘it is popular opinion that the vertically
integrated providers appear to be in a stronger competitive position as a result of FOFA’, a view
supported by Thomson Reuters’s 2015 compliance survey, which reported that ‘global systemically
important financial institutions, given their larger size of operations and resources, are better
equipped to manage [the challenges caused by regulatory change]’.
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The Banking Royal Commission may well be the costliest development in the financial services
industry, however. As Commissioner Hayne did not recommend significant changes to the model of
business for financial advice (Vickovich 2020), such as a move to individual licensing, implementation
costs have largely been focused on the remediation costs to consumers of financial services. A recent
report by Deloitte suggests that $2.4 billion in compliance, fines and remediation by the big four
banks (Sharpe 2020). ANZ, for example, noted that there had been close to 2 million accounts
affected, and in the period between 2017 and 2019 the remediation cost to ANZ alone had been
$1.58 billion (ANZ 2020). During the course of the hearings, the banks announced plans to divest
themselves of their financial planning and wealth management divisions, signalling a significant move
away from the vertically integrated model.
It is suggested that the industry-wide loss to consumers due to ‘misconduct or inappropriate actions’
over a five year period was $201 billion (Ziffer 2019). This includes misconduct by the banks, but also
the largest wealth manager, AMP, as well as the smaller industry participants. Remediating this
entire loss, if this figure is ultimately correct, will be a significant weight on the sector. For its part,
AFCA has lauded its awards of $185 million in its first year of operation, on the back of a 40%
increase in the number of complaints received after its inception compared to under its predecessor
schemes (AFCA 2020).
7 Overseas financial services systems

Set out below is a brief summary of the features of five overseas financial systems and the
arrangements in place to regulate them. These are relevant to Australia both because the Australian
system is required to align with them to some extent and Australian financial services providers deal
with investments in these systems. Topic 5 provides further information on regulators, including
overseas regulators.
7.1 Introduction
The global nature of financial services and markets has a significant impact on the operation
and regulation of the Australian financial services system. It does this in two main ways:
 The Australian financial services system has to align with financial systems in comparable
countries and is both influenced by and is an influence on these overseas systems.
 Australian companies now operate in, and investors invest directly in, so many overseas countries
that it is necessary to have a broad understanding of their financial services systems.
Example: Globalisation
There are few better examples of globalisation and alignment than the following
that occurred in exchanges during 2007:
• The New York Stock Exchange and Euronext merged.
• The London Stock Exchange and Borsa Italiana merged.
• The New York Stock Exchange bought a 5% stake in the National Stock Exchange
of India.
• The Tokyo Stock Exchange acquired 5% of the Singapore Exchange.
• Deutsche Bourse and the Singapore Exchange each bought 5% of the Bombay Stock
Exchange.
Below is a brief outline of ASIC’s principles for cross-border regulation and the main features of some
of the overseas financial services systems most relevant to Australian companies and investors.
4.55
It will be seen that there are different views on the way financial systems should be run.
Some countries (e.g. the United States) have the central bank also regulating banks, in contrast to
having a separate regulator like APRA, while other countries (e.g. Singapore) have a central bank
which regulates banks and the financial services industry as well.
Some countries do not have a licensing system for advisers (as in Australia), but prefer to rely on a
co-regulatory model of industry self-regulation overseen by a regulatory authority (as happens in
New Zealand).
7.2 Cross-border regulation

In recognition of the increasing significance of foreign markets, products and services within Australia
over recent years, Australian regulators have worked actively in a range of internationally focused
projects.
7.3 New Zealand

There is active cooperation between the New Zealand and Australian financial services systems.
Cooperation between Australia and New Zealand

An important feature of the Australian and New Zealand financial services systems is the close
integration and cooperation between them. This is a deliberate policy by the governments of both
countries built around the Australia–New Zealand Closer Economic Relations Trade Agreement which
came into effect in 1983.
A good example of the integration of the systems is in banking. Given that the big four
Australian banks control over 85% of the assets of the New Zealand banking system, the regulation
of banks in Australia is of vital importance to the New Zealand banking system. This has led to the
inclusion of s 8A in the Australian Prudential Regulation Authority Act 1998 (Cth):
(1) In performing its functions and exercising its powers, APRA must:
(a) support the prescribed New Zealand authorities in meeting their statutory
responsibilities relating to prudential regulation and financial system
stability in New Zealand, and
(b) to the extent reasonably practicable, avoid any action that is likely to have a
detrimental effect on financial system stability in New Zealand.
Under changes to the Trans-Tasman Mutual Recognition scheme announced in January 2009,
issuers offering securities or interests in collective or managed investment schemes in Australia
and New Zealand may use one disclosure document prepared under regulation in the issuer’s
home country.
Issuers who wish to operate under the scheme will be able to comply with minimal entry and
ongoing requirements agreed to between the two countries and prescribed in each country’s law.
ASIC, the New Zealand Companies Office (NZCO), and the then New Zealand Securities Commission
(NZSC) established processes for cooperation between the authorities in administering the mutual
recognition scheme. In 2012, ASIC and the Financial Markets Authority (FMA) entered into a
wide-ranging Memorandum of Understanding, covering such matters as general regulatory issues or
developments, issues relevant to the operations, activities and regulation of persons whose activities
have a connection with either or both jurisdictions, and the identification of risks to Australian and
New Zealand markets and investors (FMA 2012).
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In Australia, ASIC is the regulator for offers of securities and investigates suspected contraventions
of Australian law.
In New Zealand, there are two regulators for securities offers:
 the FMA (which replaced the NZSC in May 2011) is responsible for financial regulation in
New Zealand, covering financial market participants, exchanges and the setting and enforcing of
financial regulations
 the NZCO is responsible for the registration of corporate bodies and corporate documents,
which includes registration of prospectuses for offers of securities in New Zealand.
7.4 United Kingdom

A central bank (the Bank of England) is responsible for monetary policy and financial stability.
The Financial Services Authority, which previously regulated most financial services markets,
exchanges and firms in the United Kingdom, was abolished as of 1 April 2013. Its responsibilities
were split between two new regulatory authorities: the Prudential Regulation Authority and the
Financial Conduct Authority.
The Prudential Regulation Authority, which is part of the Bank of England, is responsible for the
prudential regulation and supervision of banks, building societies, credit unions and major
investment firms. It sets standards and supervises financial institutions at the level of the
individual firm.
The Financial Conduct Authority regulates the financial services industry. It is an industry-funded
body, which operates independently of the UK government. Its aim is to protect consumers, ensure
the industry remains stable and promote healthy competition between financial services providers.
It supervises firms differently depending on their size and the nature of their business. This includes:
 continuous conduct assessment for large firms and regular assessment for smaller firms
 monitoring products and other issues to ensure firms play fair and do not compromise
consumer interests
 responding quickly and decisively to events or problems that threaten the integrity of the industry
 ensuring firms compensate consumers when necessary.
7.5 Singapore
Regulation of the whole financial services industry in Singapore is centred on the Monetary Authority
of Singapore, which is the central bank and has the stated functions of:
 acting as the central bank of Singapore, including the conduct of monetary policy, the issuance
of currency, the oversight of payment systems and serving as banker to and financial agent of
the government
 conducting integrated supervision of financial services and financial stability surveillance
 managing the official foreign reserves of Singapore
 developing Singapore as an international financial centre.
There is a specific law, the Financial Advisers Act (FAA), which regulates this part of the industry.
There are licensed financial advisers under the FAA and exempt financial advisers (banks and
financial institutions which are regulated under other laws requiring similar standards to the FAA).
These are the only entities which can use the term ‘financial advisers’, which shows they are
regulated. The use of other terms, for example ‘financial planners’, is not forbidden but this shows
the entity is not regulated by the Monetary Authority of Singapore.
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‘Independent’ advisers are allowed to advise on any products. Advisers who are not independent
may only recommend products of product providers they are ‘tied’ to.
7.6 United States

The US financial services system is, in general, less centralised than in Australia, with states retaining
a great deal of involvement; for example, there is a dual banking system. There are state-chartered
banks which operate under state laws and are supervised by state banking authorities. Other banks
are part of the Federal Reserve system, which consists of a Board of Governors in Washington, DC,
and 12 regional Reserve Banks. The principal responsibilities of the Board of Governors are the
formulation of monetary policy and regulation of banks that are part of the Federal Reserve system.
Companies are usually incorporated under the laws of a state and the corporate laws vary a great
deal from state to state. Company law in Delaware is considered to be the most advantageous and
a majority of public companies in the US are incorporated in Delaware.
Securities regulation in the US is principally the responsibility of the Securities and Exchange
Commission (SEC), although there are also state regulatory bodies. Self-regulatory organisations play
an important role. The most prominent of these is the Financial Industry Regulatory Authority,
which oversees over 4,000 brokerage firms.
Investment advisers also operate under a dual system. Where they register is largely determined
by the amount of assets they supervise or manage. Where large sums (e.g. over $US100 million)
are supervised or managed, they must register with the SEC. With lesser amounts, registration is
required in each state in which the adviser operates.
7.7 Hong Kong

The legal framework in Hong Kong is unique. Hong Kong is a Special Administrative Region of the
People’s Republic of China (PRC). Both its laws and its financial system are distinct from those of the
PRC. The ‘Basic Law’ is Hong Kong’s constitutional document and it provides that the capitalist
system will continue to operate until 2047.
In the financial services system, Hong Kong’s central banking institution, the Hong Kong Monetary
Authority, which is responsible for monetary policy, supervises the banks. The Securities and Futures
Commission regulates:
 ‘intermediaries’ such as brokers and investment advisers
 issuers of securities
 market operators.
For ‘intermediaries’, there is a licensing system with 10 types of regulated activities. Approval is
required for engaging in different regulated activities. For example, a company dealing securities
and futures has to be licensed for Type 1 and Type 2 activities.
The Office of the Commissioner of Insurance separately regulates the insurance sector.
4.58
8 Conclusion
This topic has provided a broad picture of the purpose of Australian financial services law
(in particular, the Corporations Act); the way that regulation has developed and continues to evolve;
the role, obligations and rights of the major participants in the Australian financial services system;
and a brief comparison with some overseas financial services systems.
Against this background, Topics 5 and 6 will consider firstly the regulatory authorities which
implement and supervise the law and secondly the detailed operation of the Australian financial
services licensing regime. Topic 7 will examine disclosure, which is an essential part of the overall
regime, especially as it serves to ensure clients can make informed decisions about their financial
investments and decisions.
4.59
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provision-of-financial-advice-background-paper-7.pdf>.
Letts, S 2018, ‘Macquarie joins rush to ban grandfathered commissions to financial advisers’,
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joins-the-rush-to-ban-grandfathered-commissions/9935994>.
Lucy, J 2006, ‘The financial advice industry in Australia: The regulator’s perspective’, speech to the
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Parliament of Australia 2009, Inquiry into financial products and services in Australia,
Parliamentary Joint Committee on Corporations and Financial Services, November,
viewed 27 October 2020,
<http://www.aph.gov.au/binaries/senate/committee/corporations_ctte/fps/report/report.pdf>.
4.61
Parliament of Australia 2014, Inquiry into proposals to lift the professional, ethical and
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<https://www.aph.gov.au/Parliamentary_Business/Committees/Joint/Corporations_and_Fina
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4.62
Legislation
• Anti-Money Laundering and Counter-Terrorism Financing Act 2006
• Australian Prudential Regulation Authority Act 1998
• Australian Securities and Investments Commission Act 2001
• Banking Act 1959
• Competition and Consumer Act 2010
• Corporations Act 2001
• Corporations Amendment (Future of Financial Advice Measures) Act 2012
• Corporations Amendment (Further Future of Financial Advice Measures) Act 2012
• Corporations Amendment (Life Insurance Remuneration Arrangements) Act 2017
• Corporations Amendment (Professional Standards of Financial Advisers) Act 2017
• Crimes Act 1914
• Criminal Code Act 1995
• Financial Advisers Act 2008
• Financial Services Reform Act 2001
• Insurance Act 1973
• Insurance Contracts Act 1984
• Life Insurance Act 1995
• National Consumer Credit Protection Act 2009
• Reserve Bank Act 1959
• Superannuation Industry (Supervision) Act 1993
• Treasury Laws Amendment (2019 Measures No. 3) Act 2020
• Treasury Laws Amendment (Strengthening Corporate and Financial Sector Penalties) Act 2019
• Corporations Bill 2001.
Cases
• Aequitas v Sparad No 100 Limited (formerly Australian European Finance Corporation Limited)
(2001) 19 ACLC 1006
• Ali v Hartley Poynton Ltd (2002) VSC 113
• ASIC v Citigroup Global Markets Australia Pty Limited (No 4) [2007] FCA 963
• ASIC v DB Management Pty Ltd (2000) HCA 7
• Australian Securities and Investments Commission v Park Trent Properties Group Pty Ltd (No 3)
[2015] NSWC 1527
• Bristol and West Building Society v Mothew (1998) Ch 1
• Commonwealth Bank of Australia v Smith (1993) 42 FCR 390
• Daly v The Sydney Stock Exchange Limited (1986) 160 CLR 371
• R v Hughes [2000] HCA 22
• Re Wakim; Ex parte McNally [1999] HCA 27
• Trade Practices Commission v CSR (1991) ATPR 41–076
4.63
Suggested answers

1. Financial services law aims to promote commercial certainty, reduce business costs,
increase market efficiency and encourage investor confidence.
2. Advantages of a well-regulated financial services system include same rules for everybody and
no market risk premium; businesses operate profitably and investors are treated fairly;
markets are respected internationally; participants understand obligations; investor confidence
and regulatory system are respected.
3. The Corporations Act is the main legislation governing the financial services industry.
4. Criminal and civil penalty regimes are provided for under the Corporations Act.
5. Australia has a ‘two principal regulators’ or ‘twin peaks’ model — the main regulators are ASIC
and APRA, with the RBA and ACCC also playing a role.

1. (a) Parliament passes legislation.
(b) Courts interpret the legislation and determine law where there is no legislation.
(c) The regulatory authorities implement and supervise the law.
2. Financial services providers have a wide range of obligations and duties. Those under the
Corporations Act include:
 providing financial services efficiently, honestly and fairly
 ensuring adequate arrangements are in place for the management of conflicts of interest
 complying with licence conditions
 complying with financial services laws
 ensuring representatives comply with the financial services laws
 having adequate resources available
 maintaining competence to provide financial services
 ensuring representatives are adequately trained and competent
 having a dispute resolution system for retail clients
 having adequate risk management systems
 meeting disclosure requirements.
Other duties and obligations arise from contractual obligations, the law of negligence,
fiduciary relationships and industry body rules and guidelines.
3. Compliance — financial adviser organisations must ensure they have a compliance system in place
and that they monitor the behaviour of employees and representatives.

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Topic 4: Overview of financial services

Economic and Legal Context for Financial Planning

1 Purposes of financial services law ........................................................................................4.2

2 Development of current financial services law .....................................................................4.3

3 Chapter 7 of the Corporations Act 2001 (Cth) ..................................................................... 4.13

4 Participants’ roles, obligations and rights ........................................................................... 4.23

5 Regulatory reform and current issues ................................................................................ 4.33

6 Impact of ongoing reforms ................................................................................................. 4.51

7 Overseas financial services systems ................................................................................... 4.54

8 Conclusion ......................................................................................................................... 4.58

Suggested answers ........................................................................................................................ 4.63

Topic learning outcomes

1 Purposes of financial services law

1.1 Advantages of a well-regulated financial system

2 Development of current financial services law

2.1 Financial services law

Corporations Act 2001 (Cth)

Key concept: Corporations Act

Australian Securities and Investments Commission Act 2001 (Cth)

Australian Prudential Regulation Authority Act 1998 (Cth)

Reserve Bank Act 1959 (Cth)

Competition and Consumer Act 2010 (Cth)

Evolution of the Corporations Act

Company and securities law

Financial services reform

Table 1 Timeline of post-implementation reforms to financial services reform legislation

Criminal and civil penalty regimes under the Corporations Act

Application of the federal Criminal Code

Example: Physical elements of an offence

Fault elements specified in the Criminal Code

Fault elements specified in Corporations Act

Similarly, to prove a contravention of s 1041E, it is also necessary to prove the statement or

Other enforcement options under the Corporations Act

2.2 Regulatory structure

2.3 Background to reforms

Present regulatory structure

Has the structure been successful?

Review your progress 1

Reflect on this: Future regulation

3 Chapter 7 of the Corporations Act 2001 (Cth)

3.1 Objects of Chapter 7 of the Corporations Act

Table 2 Legal framework for the provision of financial advice

Additional requirements for advising retail clients

Additional requirements for giving personal advice to retail clients

3.2 Key definitions

Licensing financial service providers

Providing a financial service

Financial product advice

Personal advice and general advice

Dealing in or arranging a financial product

Australian financial services licensees, their representatives and

relevant provider: a person is a relevant provider if the person:

relevant financial products mean financial products other than:

The licensee may authorise:

Any authorised representative of an AFS licensee may appoint or ‘sub-authorise’ individuals to

Providers and providing entities

4 Participants’ roles, obligations and rights

4.1 Federal government

4.3 Regulatory authorities

4.4 Financial services providers

Who are financial services providers?

Role of financial services providers