Contract & Consumer Law Chapter 12 Financial Services Consumer Protection

12.1 Australian Securities and Investments Commission (ASIC) ASIC is the main government ‘watchdog’ for regulating the financial services industry in Australia. ASIC’s duty is to monitor and enforce compliance with the relevant legislation to ensure that financial services are provided in a fair and transparent manner. Its aim is to protect markets and consumers from manipulation, deception and unfair practices and promote confident participation in the financial system.

12.2 Australian Financial Services Licenses Under the Corporations Act 2001 (Cth), all persons or business that offer ‘financial services’ with some continuity must hold an Australian Financial Services Licence (AFS Licence). The licencing regime exists to ensure that providers of financial products are qualified and that mechanisms are in place to protect the interests of clients.

Australian Financial Services Licences Personal advice is advice that takes into account a customer’s specific financial circumstances. General advice is broad advice that does not take into account an individual’s personal circumstances.

Australian Financial Services Licences A retail client is an individual who seeks financial services for personal rather than business reasons. Additional obligations are placed on licencees when dealing with retail clients because they are less experienced with the working of the financial services industry.

Australian Financial Services Licences Prohibited Conduct Prohibited conduct under the Corporations Act 2001 (Cth) includes: Market manipulation. False trading and market rigging. The spreading of information about illegal transactions. False or misleading statements. Inducing people to deal. Dishonest conduct. Misleading or deceptive conduct.

Australian Financial Services Licences Penalties An AFS licensee who does not comply with their obligations under the Corporations Act may have committed an offence which is punishable by a fine or otherwise. Any contract the result of the licensee's breach of provisions may be ordered void by the court and the court may order the return of money to an innocent party. Persons who have suffered a loss or damage as a result of the licensee’s breach of the provisions may commence a civil action for any loss.

Reforms to Financial Services Laws Major reforms to financial advice services became compulsory in July 2013. Reforms include: A ban on commissions for retail financial advice. Increasing the transparency and flexibility of payments for financial advice. The introduction of a statutory fiduciary duty so financial advisers must act in the best interests of their clients. Wider availability of low cost simple advice. Strengthening of ASIC’s powers to deal will deceitful businesses. The requirement that accountants have an AFS licence before giving financial advice regarding particular financial products.

Definition of Financial Services for purpose of AFS Licence A person or business will provide ‘financial services’ if they are: Buying or selling financial products. Providing financial advice. Making a market for a financial product. Operating a registered managed investment scheme. Providing custodial or depository services.

Definition of Financial Products for purposes of AFS Licence Financial products include products that can be used to: Make or manage financial investments (shares, superannuation deposit accounts, insurance, derivatives etc.) Make non-cash payments (cheques, debit card payments). Does not include credit facilities (such as loans or credit cards) which are subject to the National Consumer Credit Code.

Obligations of AFS Licencees General Obligations - AFS licensees have general obligations to: Take necessary steps to ensure that financial services are provided efficiently, honestly and fairly. Comply with the conditions on the licence. Comply with all financial services laws. Put in place risk management systems. Maintain the competence to provide financial services. Have arrangements in place to manage conflicts of interest. Maintain resources for the financial services to be carried out. Take reasonable steps to ensure authorised representatives comply with financial services laws. Have an adequate dispute resolution system.

AFS Licensees’ Disclosure Obligations Disclosure Obligations - AFS licensees have four key disclosure requirements: Financial Services Guide (FSG): Sets out the types of products and services an organisation provides. Statement of advice (SOA): Written record of any personal advice provided to a customer. Product Disclosure Statement (PDS): Describes the main features of any financial product recommended or sold. Periodical Statements of Account: Keeps the client updated on how much they have paid is costs and fees to the service provider.

Provision of Personal Advice by AFS Licensees When providing personal advice to a retail client a financial provider must: make reasonable inquires into the clients personal financial circumstances; have a reasonable basis for the advice provided; ensure the advice is appropriate to the client; warn the client if the advice is based on incomplete or inaccurate information; and give the client a statement of advice. Question: When considering the obligations of a financial provider the advantages and protections to the client are obvious. Do the obligations also provide advantages and protections to the financial provider? Explain.

12.3 ASIC Act 2001 The Australian Securities and Investments Commission Act 2001 (Cth) also sets out consumer protection with respect to financial services. The ASIC Act contains provisions relating to the following issues regarding financial services: Unfair contract terms. Unconscionable conduct. Prohibitions of misleading a deceptive conduct, false representations, pyramid scheme and bait advertising. Conditions and warranties in relation to consumer transactions. Note that the ASIC Act provides similar protections to consumers when dealing with financial products and services as the CCA provides to consumers when dealing with household products and services. Whereas the ACCC is responsible for enforcing the CCA, ASIC is responsible for enforcing the consumer protection provisions with respect to financial services under the ASIC Act. This is consistent with the ‘watchdog’ role of ASIC in dealing with financial services and products generally, including the financial behaviour of companies.

12.4 National Responsible Lending Laws Businesses that deal with credit products (e.g.: loans, credit cards, mortgages) must uphold certain legal standards and obligations. All businesses offering ‘regulated credit activities’ must hold an Australian Credit Licence (ACL).

National Responsible Lending Laws Licensees must provide credit to consumers responsibly. This requires an assessment of: The suitability of a credit product to fulfill the customer’s needs. Licensees need to make reasonable inquiries into the consumer’s requirements and objectives. The consumer’s capacity to repay the proposed credit debt. This includes taking into account the consumer’s current income and expenditure, their credit history, and their future prospects.

12.5 Tax Agents and Tax Practitioners Board Tax agents are regulated by: Tax Agent Services Act 2009 (Cth) establishes the Tax Practitioners’ Board Tax Agent Services Regulations 2009 Tax Agent Services (Transitional Provision and Consequential Amendments) Act 2009 (Cth) The Board has responsibility for registering tax agents and BAS agents and ensuring such agents have appropriate education. It also investigates complaints.