The Financial Services Reform Act

What is FSRA?

The Financial Services Reform Act (FSRA) is Federal legislation introduced to bring various financial services and products under one licensing regime.  It introduces a new disclosure regime for most financial products and establishes a standard of conduct for financial service providers with the aim of increasing the level of compliance and competency in the financial service industry.

A business that provides a "financial service" must be licensed.  Financial service includes providing financial product advise and dealing in financial products.  Another key component of the FSRA is training.  All licensees or their authorised representatives must undergo certain prescribed training course.

The FSRA commenced on 11 March 2002, with a 2-year 'transition period' to 11 March 2004, the deadline by which an Australian Financial Services License (AFSL) is required

FSR creates a single licensing and disclosure regime for the financial services industry, including:

•  Advisers, e.g. Accountants, CPA’s

•  Licence holders

•  Markets

•  Product providers

• Other financial services providers, e.g. Custodians

Who regulates FSR?

The key regulator is the Australian Securities and Investments Commission (ASIC). It is responsible for enforcing company and financial services laws to protect consumers, investors and creditors.  Its authority covers Australian companies, financial markets, financial services organisations and professionals who deal and advise in investments, superannuation, insurance, deposit taking and credit.

What does licensing mean?

One of the significant effects of FSRA is to introduce a uniform licensing scheme for people who engage in financial advice or provide financial services.  The FSRA obligates people who provide financial services to obtain an Australian financial services licence (AFS licence) or become the representative of a licensee. The licences issued by ASIC are called Australian Financial Services Licences (AFSL).  For instance, if a person holds an AFSL are obligated to provide a Statement of Advice or Financial Services Guide commences after a person obtains an AFS licence.

What is a financial product?

There are three general concepts which form the definition of a financial product:

• Making a financial investment, e.g. shares, managed investments, superannuation,  bank deposits, investment life policies

• Managing a financial investment, e.g. insurance, derivatives/hedging)

• Making a non-cash payment, e.g. direct debit facility, cheque facility, smart cards, traveller's cheques)

These product are excluded – health insurance, credit facility, funeral benefit, direct property, wine, art and stamp collection.

What is a financial service?

Under the legislation a person will be considered to provide a "financial service" if they:

• Several high profile corporate failures linked to poor risk management and corporate governance.

• deal in a financial product

• provide financial product advice

• make a market for a financial product

• operate a registered managed investment scheme

• provide custodial or depository services

Disclosure

The various disclosure requirements that currently exist for financial products and services will, in general, be replaced by the reforms in the legislation i.e. product disclosure statements, statements of advice, and financial services guides.

This includes disclosure requirements that attach to some loan services and retirement savings accounts. These disclosure requirements apply to "retail clients" of these services i.e. where the client is provided with a financial product or service. It will include material information that might reasonably be expected to influence a client's decision to acquire the service or product.

Product disclosure statement

This is a regulated statement that applies to financial products.  In general a Product Disclosure Statement must be given by a licensed provider to a retail client where:

• a recommendation is given to acquire a financial product

• an offer is made for a financial product

Financial services guide

This is a regulated guide that applies to financial services.  In general a Financial Services Guide must be given to a retail client by a provider of financial services (or their authorised representatives) before the service is provided

Statement of advice

A Statement of Advice must be provided when personal advice is given to retail clients. It must state the advice that is given and be provided as soon as possible. This must be done before any service in relation to the advice is provided. There are some exceptions to this, for example concerning telephone advice where the client agrees.

What is the impact of the FSRA?

FSRA will impact many financial services institutions like banks, insurance companies and non-financial service businesses like accountants and lawyers who traditionally provided certain financial products.

The key to reducing the risk of non compliance to FSRA is to understand the product and/or services you provide.  There are also specific inclusions and exclusions that apply. 

If the FSRA regime does apply to you, an appropriate compliance program is required to ensure that you stay on top of any changes and that you are actually complying with the requirements.