29
Apr

FSLRC on Financial Consumer Protection

By Deepti George, IFMR Finance Foundation

This post is a continuation of our blog series on FSLRC report.

Keeping in mind the existing state of consumer protection measures in place for India, FSLRC has proposed a consumer protection framework for financial services, with the stated objectives being – to protect and further the interests of consumers of financial products and services; and to promote public awareness in financial matters. It is pertinent to mention here that the Commission has included, in its definition of retail consumer, not just individuals but also enterprises that avail a financial product or service whose value does not exceed a limit as prescribed by the regulator1, or who has less than a specified level of net asset value or turnover, also as prescribed by the regulator . The previous post mentioned the rights and protections that the draft Code sets out. Among these rights are the right against unfair contract terms and the right to redress of complaints.

The right against unfair contract terms

The Draft Code deems an unfair term of a non-negotiated contract2 to be void. A term is unfair if it causes a significant imbalance in the rights and obligations of the parties, to the detriment of the consumer, and is not reasonably necessary to protect the legitimate interests of the provider3. Further, the Draft Code enlists a set of factors that would be considered in determining whether a term is unfair or not – such as the nature of the service, the extent of transparency of the term, the extent to which the term allows comparison with other financial products or services, and the dependency of the term with the remaining contract and with other contracts under question. If a term was found to be unfair, the contract will continue to be enforced with the remaining terms as long as it can do so without the unfair term.

This is very much in line with the laws laid out in Australia, in as late as 2010, through the Competition and Consumer Act 2010. While Australia already had laws in place to protect consumers against unfairness in contractual dealings (ex: prohibition of unconscionable or misleading and deceptive conduct), this Act introduced a new ‘unfair contract terms’ regime to standard form consumer contracts4 under which courts can decide if a term in the contract is found to be unfair5, in which case the contract is void. However, the contract will continue to bind parties if it is capable of operating without the unfair term. Examples of unfair terms are set out in an indicative list in the law6.

The right to redress of complaints

The Commission addresses this right in two steps – the first, is by placing a requirement on providers to have in place an effective mechanism to redress complaints internally, to inform consumers about their right to redress, and the process to be followed for it; and the second, is by having a statutory body external to the provider, that will be a unified grievance redressal system to redress complaints. This body termed the Financial Redress Agency (FRA), will replace sector-specific Ombudsmans currently in existence such as those for banking and insurance. Whether or not the FRA will replace the Consumer Courts (instituted by the Consumer Protection Act, 1986), will be decided later based on how well the FRA succeeds in its task.

FSLRC_CP1

FSLRC has also created a niche for consumer advocates to contribute to the regulator’s functions, through the creation of an Advisory Council on Consumer Protection. This body, with adequate representation from experts in the fields of personal finance and consumer rights, is expected to advice, comment on, and review the effectiveness of regulator’s policies. The regulator in turn is held accountable to respond to such proposals made by the Council, thereby bringing in an element of transparency to the regulatory decision-making process.

  1. This is not uncommon. In Australia, for instance, retail consumer includes small businesses, which are defined by s761G of Corporations Act 2001, as a business employing fewer than 100 people (if the business manufactures goods or includes manufacture of goods), or 20 people (otherwise)
  2. A non-negotiated contract is one in which the provider has a substantially greater bargaining power relative to the customer in determining the terms of the contract; and it is a standard form contract
  3. This however does not include a term that is reasonably needed to protect the legitimate interests of the provider, is a basic term such as the price of a product, or is a term required under any law or regulations
  4. All contracts will be presumed to be standard form contracts unless otherwise established. It is typically one that has been prepared by one party to the contract (the supplier) and is not subject to negotiation between the parties
  5. A contract term is considered unfair if:
    • – It would cause a significant imbalance in the parties’ rights and obligations arising under the contract, and
    • – It is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term, and
    • – It would cause detriment (whether financial or otherwise) to a party if it were to be applied or relied on.
  6. s25, CCA 2010. Some are given below: A term permitting one party (but not another party)
    • – to avoid or limit contractual performance or to terminate the contract
    • – to renew or not to renew the terms of the contract
    • – to unilaterally determine whether to determine whether the contract has been breached
    • – a term limiting one party’s vicarious liability for its agents

6
Jan

A Paradigm for Suitability: Part III

By Deepti George, IFMR Finance Foundation

The previous post covered the process of “Suitability” in financial services. Here, we cover aspects of the legal and regulatory structure that will aid in establishing an effective Suitability regime in India.

The primary objective of finance is to improve the financial well-being of consumers. For this to happen in India, there needs to be a shift towards a higher-trust-equilibrium between the consumers, financial service providers and the regulators. However, this is not possible to achieve under the following two scenarios:

  1. A disclosure-based approach to financial intermediation, which has inadvertently ended up as a way for providers to absolve themselves of their responsibilities to their consumers.
  2. A purely rule-based regime in which product approval is left in the hands of the regulator, absolves the provider of the responsibility of creating products that are truly welfare-enhancing for the consumer.

The “Suitability” regime seeks to reach this higher trust equilibrium by placing a direct responsibility, through legal liability, on the financial services provider for its advice or recommendation. To give teeth to this responsibility, it becomes a prerequisite to insert into law the Right to Suitability. The Approach paper recently put out by the Financial Sector Legislative Reforms Commission seeks to enshrine this right in the law. Every citizen must have the right to be provided suitable advice or recommended suitable products. By incorporating this, consumers would be empowered to move a court of law in case this right is denied. Its introduction into primary law would be followed by changes to subordinated legislation which the regulators have the mandate to execute and supervise. This will shape the behavior of financial services providers, who will evolve the suitability process and practices that are consistent with subordinated legislation. The suitability regime places a very strong burden on everyday behaviour of the provider.The interpretation of suitability will emerge from the building up of case laws and judicial precedents, ensuring that our understanding of suitability comes from the reality and evolution of the market over time.

The Suitability regime would require the regulator to take a more non-interventionist approach towards product approvals for providers; providers should be free to develop products based on the needs of the market. This will ensure that both providers as well as regulators will have more leeway and will enable the creation of incentives that push the providers to innovate on socially useful product development. This does not however, in any way, indicate that the Suitability Regime would be a ‘light-touch’ one solely characterized by completely unrestrained market participants let loose on unsuspecting consumers. While the regulator steps back from product approvals, it would have greater supervisory responsibilities. This ex-ante regulatory oversight, coupled with a strong, unified ex-post redressal mechanism that also gives ‘real-time’ feedback to all regulators to aid in their monitoring, would provide severe disincentives for providers to offer bad advice or recommend inappropriate products to consumers. The redressal mechanism must include penalties that are not just compensatory in nature (to cover the losses incurred by the aggrieved), but also heavily punitive for non-compliance, which would act as a severe deterrent for the future. This could be in the form of direct liability on the heads of financial institutions, product recalls, and the like.

Coordination among regulators would assume tremendous importance in this regime. The Financial Stability and Development Council (FSDC) plays a big role in facilitating this. The agenda for development of the financial sector must be decided solely by the FSDC and the Finance Ministry. Keeping the regulators responsible only for their respective domains will help remove any conflicting objectives the regulators might have faced otherwise.

How can suitability be enforced in a country like India where vast majority of the population have only limited or no access to basic financial services? If a consumer has access to only one product provider, should the provider sell the consumer a product that it has concluded to be unsuitable for her? Is Unsuitable access better or worse than no access? This situation, of a single product in low-access environments, can be overcome by getting the provider to develop natural suitability guidelines – which indicate a class of consumers for whom the product is automatically suitable; and serving the product to only those consumers. Besides, the provider can come up with natural “unsuitability” guidelines which, at the very least, stand by the principle of ‘do no harm’. This framework will automatically push for a bias in favour of distributors who can offer a single yet perfectly suitable product, and going forward, offer multiple products. It is likely that the Suitability equilibrium will shift the market from single product providers to multiple product providers.

The regulatory costs of implementing the Suitability paradigm need to be considered in greater detail. Further work will need to be carried out to arrive at a conclusion of whether the costs would be lesser or greater both in the short term and in the long term.

Also, greater thought will need to be given to develop a framework for supervising the Suitability regime. We can however learn from experiences from other countries which have already covered considerable ground in this aspect. The box below looks briefly at how Australia has been enforcing Suitability.

Enforcing Suitability – Lessons from Australia

Australia has a single market conduct regulator, the Australian Securities and Investments Commission (ASIC), whose mandate is to ensure that Australia’s financial markets are fair and transparent, and are supported by confident and informed investors and consumers. ASIC administers the Financial Services Reform Act 2001 (FSR Act), which requires persons who provide financial product advice to retail consumers to comply with certain conduct and disclosure obligations. More details can be found here.

ASIC places legal obligations on financial services firms to meet specific conduct, disclosure, skills as well as professional indemnity insurance requirements, amongst others, to implement the Suitability requirement. Potential breaches of the law are brought to ASIC’s notice through reports of misconduct from the public, through referrals from other regulators, statutory reports from auditors and the licensees themselves, and through ASIC’s own monitoring and surveillance work (through regular surveillance visits and shadow shopping studies, the results of which are shared in the public domain). ASIC is empowered to take a variety of actions such as:

  • Punitive actions such as court order, prison terms, criminal and civil financial penalties;
  • Administrative actions (without going to court) such as ban on providing financial services, revocation, suspension or variation of conditions of licenses, public warning notices;
  • Preservative actions such as injunctions; and
  • Negotiated resolutions such as through enforceable undertakings, and others

ASIC can decide on which remedy to take depending on various factors such as the severity of the suspected misconduct, the extent of losses, the compliance history of the individual or firm in question, and so on. The table lists major deterrence outcomes by type of action taken

(Source: ASIC Annual Reports):

20
Mar

Regulating consumer credit intermediation

By Deepti George & Darshana Rajendran, IFMR Finance Foundation

This post is a continuation of our Consumer Protection blog series. The next two posts would look at the Evolution of Consumer Protection Laws in India.

Australia and South Africa have introduced separate regulatory regimes for consumer credit, which has consumer protection aspects at the heart of it. These form examples of function-based regulation, which is fundamentally different from institution-based regulation prevalent in India.

Consumer Credit Protection in Australia

The Council of Australian governments (COAG) agreed on 3rd July 2008 that the Australian Government would assume responsibility for regulating consumer credit. The National Consumer Credit Reform Package marks Phase-one of Australia’s attempt to regulate consumer credit and comprises the National Consumer Credit Protection Act 2009 (NCCP Act) as the central piece of legislation. While the legislations for Phase-two are being put in place, phase one comprises of the following:

• Licensing regime for all consumer credit providers and credit assistance providers
• Responsible lending conduct obligations and disclosure obligations
• Enhanced enforcement powers to ASIC to administer the NCCP Act
• Expanded redressal mechanisms
• National Credit Code to replace the state-wise Uniform Consumer Credit Codes

Licensing regime

The goal of this is to promote consumer confidence in using credit, and to promote the undertaking of efficient, honest and fair credit activities by all licensees and their representatives. The National Credit Code applies to only credit1 that is provided to a person or a strata corporation, and for personal, domestic or household purposes, and for refinancing of such credit. It can also be for the purchase, renovation or improvement of residential property for investment purposes. This definition encompasses2 all credit providers such as banks, credit unions, finance companies and other lenders; and all credit assistance providers, such as credit advisers and mortgage and credit brokers.

Responsible lending conduct obligations3

These are intended for the following4 and are meant for both credit providers and credit assistance providers.

(a) Introduce standards of conduct to encourage prudent lending and leasing and impose sanctions in relation to irresponsible lending and leasing, and
(b) Curtail undesirable market practices, particularly where intermediaries are involved in lending.

The licensee is obligated to conduct an assessment5 that the credit contract or lease is not ‘unsuitable’ for the consumer. In doing so, the licensee must make reasonable enquiries about the consumer’s requirements, objectives, and financial situation and take reasonable steps to verify the consumer’s financial situation. The contract is considered unsuitable if it does not meet the consumer’s requirements and objectives or if the consumer will be unable to meet the repayments, either at all, or only with substantial hardship. In such a case, the licensee must not suggest, assist or enter into a credit contract with the customer.

Reasonable inquiries about customer’s financial situation

These could include the following, depending on the circumstances:
1. The consumer’s current amount and source of income or benefits, and assets, including their nature (such as whether they produce income) and value
2. The extent of the consumer’s fixed expenses (such as rent, repayment of existing debts, child support and insurance)
3. The consumer’s variable expenses (and drivers of variable expenses such as dependents and any particular or unusual circumstances)
4. The extent to which any existing debts are to be repaid from the credit advanced
5. The consumer’s credit history
6. Any significant changes to the consumer’s financial circumstances that are reasonably foreseeable
7. Geographical factors, such as remoteness, which may require consideration of specific issues
8. Indirect income sources (such as income from a spouse) where that income is reasonably available to the consumer

Reasonable inquiries about customer’s requirements and objectives

These could include the following, depending on the circumstances:
1. Amount of credit needed or the maximum amount of credit sought
2. Timeframe for which the credit is required
3. Purpose for which the credit is sought and the benefit to the consumer
4. Whether the consumer seeks particular product features or flexibility, and understands the costs of these features and any additional risks

Verifying customer’s financial situation

This obligation differs between credit providers and credit assistance providers. ASIC acknowledges that the latter would not have access to information that the credit provider has, such as credit reports, bank account and credit card information, reports from other lenders (subject to Privacy Act 1988) and so on. However, credit assistance providers are expected to gather information from payslips, income tax returns, statements from the customer’s accountant, business activity statements and so on. This is applicable to credit providers too.

Substantial hardship as a reason for ‘unsuitability’

The NCCP Act 2009 does not define what ‘substantial hardship’ is. ASIC will however take the following factors6 into account when considering whether a transaction is likely to result in financial hardship:

1. The money the consumer is likely to have remaining after their living expenses have been deducted from their after-tax income
2. How consistent and reliable the consumer’s income is and the size of the loan relative to their income level
3. Whether the consumer’s expenses are likely to be significantly higher than average
4. The consumer’s other debt repayment obligations and similar commitments
5. How much of a buffer there is between the consumer’s disposable income and the repayments, and how vulnerable they are to an increase in interest rates, and other product features
6. Whether the consumer is likely to have to sell their assets, such as a car, to repay the loan

ASIC expects the licensees to develop appropriate systems, processes and benchmarks to assess whether the credit contract would cause financial hardship to the customer.

Compensation and insurance arrangements

All credit licensees must have in place arrangements for compensating customers for loss or damage suffered due to breaches of the NCCP Act 2009 by the licensee or its credit representatives. These arrangements are to be in the form of professional indemnity (PI) insurance that meets the requirements in the Act7 . This is aimed at reducing the risk that losses sustained by customers cannot be compensated by a credit licensee due to a lack of available financial resources.

Credit Regulation in South Africa

Similar to the case of Australia above, the National Credit Act 2005 of South Africa regulates the granting of consumer credit by all credit providers. It applies to credit agreements with all consumers and to entities such as companies, partnerships and trusts whose asset value or annual turnover is below a prescribed threshold8. It applies to most credit products where payment is deferred and a charge, interest or fee is payable on the outstanding balance. The National Credit Act also establishes the National Credit Regulator (NCR) to promote the development of an accessible credit market, particularly, to address the needs of historically disadvantaged persons, low income persons, and remote, isolated or low density communities. It is tasked with carrying out registration of credit providers, credit bureaus and debt counsellors, investigation of complaints, education, research, policy development, and ensuring enforcement of the Act. Some of the key consumer protection features of the Act are given below:

Fundamental Consumer Rights

These include:

• Right to be given dominant reason for credit being refused or discontinued (reason/s to be given in writing on request of the consumer)
• Right to information in plain and understandable language in terms of which guidelines may be published
• Right to have access to and to challenge credit records and information held by credit bureaux, to have incorrect records of debt adjustments expunged and, to be given notification before negative information is reported to the credit bureaux

Protection from Over-Indebtedness

The credit provider must conduct a proper assessment of each consumer’s ability to meet obligations, taking reasonable steps to investigate and evaluate the consumer’s:

• Understanding and appreciation of the risks, costs and obligations of the proposed agreement
• Ability to meet those obligations in a timely manner in terms of the consumer’s existing financial means and debt repayment history

A credit agreement will be reckless if the credit provider fails to conduct the required assessment, or having conducted it, enters into an agreement with a consumer despite the fact that the consumer did not appreciate the nature of the risks, costs and obligations, or could not afford them.

The Act allows for over-indebted customers to apply for assistance from a debt counsellor. Debt counsellors then conduct independent enquiries into consumers’ financial circumstances and make recommendations to the courts concerning debt restructuring and suspension of reckless credit agreements.

Protection from Aggressive Advertising

• Prohibition of negative option marketing. (This occurs when goods or services are offered to you with the assertion that if you do not return the products or refuse the service within a certain time period, you have ‘purchased’ them)
• Marketing of credit at the consumer’s home or workplace is prohibited unless the visit is prearranged or the consumer invites the credit provider to visit for that purpose
• The credit provider must give the consumer the option (and must not act contrary to the option selected), to:

a) Decline the option of pre-approved annual credit limit increases,
b) Be excluded from any telemarketing campaign, marketing or customer list that may be sold or distributed, or any mass distribution of email or SMS messages (The credit provider must maintain a register of options selected).

The Act also sets up The National Consumer Tribunal that hears cases on non-compliance with the Act, issues fines and provides redress to consumers.



1 – ASIC Regulatory Guide 203, Appendix 1,2
2 – Debt collectors, pawn brokers and margin lenders are exempt from Phase 1
3 – ASIC Regulatory Guide 209
4 – According to the Explanatory memorandum of the NCCP Bill 2009
5 – Consumer can obtain copy of preliminary assessment upon request
6 – ASIC Regulatory Guide 209
7 – ASIC Regulatory Guide 210
8 – Currently R1 million

28
Feb

Suitability and Disclosure: The case of Australia

By Deepti George, IFMR Finance Foundation

Subsequent to our earlier post in the Consumer Protection series, this post covers conduct and disclosure obligations of Australian Financial Services (AFS) License holders for provision of advice to retail clients. While disclosure obligations have traditionally been driven by the principle of caveat emptor (let the buyer beware), Australia provides an interesting case where a ‘suitability’ requirement (of the advice) is to be met by the provider and failure to do so is an offense.

The Financial Services Reform Act 2001 (FSR Act), which was incorporated into Chapter 7 of the Corporations Act 2001, requires persons who provide financial product advice to retail consumers to comply with certain conduct and disclosure obligations. These obligations were aimed at promoting consumer confidence and informed decision-making by the disclosure of all material information relating to the purchase decision in a manner that is easy to comprehend and promote product comparisons (including access to all such information).

The obligations vary depending on whether the advice given is personal advice or general advice. As per FSR Act, personal advice is financial product advice that is 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
(b) A reasonable person might expect the provider to have considered one or more of those matters

All other financial product advice is general advice. All personal advice must meet the “suitability” rule while all general advice must be accompanied by a “general advice warning”.

Personal advice is considered to be ‘suitable’ if each of the following three elements is satisfied1 :

(a) The providing entity must make reasonable inquiries about the client’s relevant personal circumstances
(b) The providing entity must consider and investigate the subject matter of the advice as is reasonable in all the circumstances
(c) The advice must be ‘appropriate’ for the client

General advice warning2 requires the providing entity to warn the client that:

(a) The advice has been prepared without taking into account the client’s objectives, financial situation or needs
(b) The client should therefore consider the appropriateness of the advice, in the light of their own objectives, financial situation or needs, before acting on the advice
(c) If the advice relates to the acquisition of a particular financial product, the client should obtain a copy of, and consider, the PDS for that product before making any decision

The licensing regime introduced by the FSR Act, aimed to reduce compliance costs for businesses offering multiple products and services by having a single set of disclosure obligations. Disclosure requirements are three in number and need to be given in writing. These are:

Financial Services Guide (FSG)

The FSG aims to help the customer decide whether to avail a financial service. It is to be given to the customer as soon as it becomes apparent to the providing entity that a financial product or service is likely to be provided. It contains the following details:

• Name, contact and license details of the providing entity
• The kinds of financial services offered to customer
• Information about who the providing entity is acting for when providing the financial service
• Remuneration for the services being offered including details of commissions and other benefits
• Associations or relationships that might influence the providing entity in providing the service (conflicts disclosure)
• Details of the compensation arrangements required by law (such as professional indemnity insurance)

The information contained in the FSG must be worded and presented in a clear, concise and effective manner3 and must be up-to-date at the time it is given.

Statement of Advice (SOA)

The SOA is provided as soon as personal advice is provided to the customer and is aimed to help the customer decide on whether to act on the personal advice (including by checking whether the information captured about the customer is correct and whether in the providing entity’s opinion, the advice is appropriate). It contains the following details besides the details of the providing entity:

• A statement setting out the advice and an explanation of the basis on which it was given, including a warning if the advice is based on incomplete or inaccurate information
• Remuneration, commission and other benefits that the providing entity may receive in connection with the advice
• Any associations or relationships between the providing entity and product issuers (or anyone else) that could influence the provision of personal advice

Product Disclosure Statement (PDS)

The PDS is provided at or before the time of a recommendation being made to buy a financial product or when an offer is made for the issue of a financial product. It is aimed to help the customer in deciding whether to purchase the product or service. The PDS contains the following details:

• Fees payable, commissions, other benefits, if any, to be disclosed in dollar4 terms
• Risks and benefits of the product
• Significant characteristics
• Significant tax implications
• Dispute resolution procedures
• Cooling off rights, if any

While ASIC does not vet any PDS prior to its release, it lays down ‘good disclosure principles’5 to help product issuers, advisors and those producing promotional publications to comply with the disclosure requirements and promote good disclosure outcomes for consumers. The table below lists these and a few examples of how ASIC interprets them.

The 2005 amendments to the Corporations Act 2001 introduced major changes to the above obligations for product issuers and licensees. Some of these include:

• Allowing licensees to tailor their FSGs according to the customer’s specific information needs
• Removing/reducing certain information from the FSG which would get covered in the PDS or in the SOA
• Exempting from the obligation to provide an SOA while giving further advice to an existing customer, subject to certain conditions
• Allowing issuers of financial products to provide a short-form PDS containing core information about the product, with full information available on request or easily available, such as in the internet
• Exempting PDSs for simple products such as for basic deposit products (issued by an authorised deposit-taking institution or ADI), or a related non-cash facility or traveller’s cheques

The major criticism to Australia’s disclosure obligation for financial service providers has been that the resulting documents have been difficult to comprehend and depend on the financial literacy levels of the individual consumer. Since the length is not prescribed, they are often very long, up to 50-100 pages, and contain legal and technical jargon. This stems from the tendency to include detailed information to avoid potential liability for omissions. The format for the document has been left to the providing entities, making it difficult for consumers to compare products. To achieve the objective of comparability between products as envisaged by the Wallis report, regulatory reform may need to prescribe either the form or the length of these disclosure documents. Consumer testing and extensive consultation with industry and consumer bodies would be needed to arrive at what would be optimal.


1 – s945A, Corporations Act 2001
2 – s949A, Corporations Act 2001
3 – s942B(6A), Corporations Act 2001
4 – Regulatory Guide 182, ASIC
5 – Regulatory Guide 168, ASIC

21
Feb

Australia’s Regulatory Principles and the Licensing of providers

By Deepti George, IFMR Finance Foundation

Continuing on our series on ‘Consumer Protection’, we will take a look at how consumer protection has found its place within the regulatory architecture of select countries, namely Australia and South Africa. A previous post had dealt on the emergence of the twin-peaks model in Australia. In this post, we briefly describe the regulatory principles that form the basis for the Australian regulatory reform process that began with the Government’s implementation of the Wallis Inquiry recommendations.

In June 1996, the Financial System Inquiry1 (known as the Wallis Inquiry) was established to:

i. Examine the results of the deregulation of the Australian financial system
ii. Examine the forces driving further change, particularly technological; and
iii. Recommend changes to the regulatory system to ensure an ‘efficient, responsive, competitive and flexible financial system to underpin stronger economic performance, consistent with financial stability, prudence, integrity and fairness.

Chapter 5 of the Wallis Inquiry report outlines the regulatory principles that the new structure was based on. The Inquiry identifies five regulatory principles, as given below:

Competitive Neutrality

Competitive neutrality requires that the regulatory burden applying to a particular financial commitment or promise apply equally to all who make such commitments. It requires further that there be minimal barriers to entry and exit from markets and products; No undue restrictions on institutions or the products they offer; and that markets are open to the widest possible range of participants.

Cost effectiveness

A cost-effective regulatory system requires a presumption in favor of minimal regulation unless a higher level of intervention is justified; an allocation of functions among regulatory bodies which minimizes overlaps, duplication and conflicts; an explicit mandate for regulatory bodies to balance efficiency and effectiveness; a clear distinction between the objectives of financial regulation and broader social objectives; and, the allocation of regulatory costs to those enjoying the benefits.

Transparency

Transparency of regulation requires that all support/guarantees from the regulator or the government to financial institutions be made explicit and that all purchasers and providers of financial products be fully aware of their rights and responsibilities, and that financial promises (both public and private) be understood by all parties concerned.

Flexibility

The constant evolution of the financial system makes flexibility critical. The regulatory framework must have the flexibility to cope with changing institutional and product structures without losing its effectiveness.

Accountability

Regulatory agencies should operate independently of sectional interests and with appropriately skilled staff. In addition, the regulatory structure must be accountable to its stakeholders and subject to regular reviews of its efficiency and effectiveness.

The Twin-peaks model of Australia encompasses two agencies, besides the Reserve Bank of Australia: The Australian Prudential Regulation Authority (APRA) and the Australian Securities and Investments Commission (ASIC). ASIC is Australia’s corporate, market and financial services regulator, which includes being the regulator for consumer credit. The Australian Securities and Investments Commission Act 2001 made ASIC responsible for the following:

1. Maintain, facilitate and improve the performance of the financial system and entities in it
2. Promote confident and informed participation by investors and consumers in the financial system
3. Administer the law effectively and with minimal procedural requirements
4. Enforce and give effect to the law
5. Receive, process and store, efficiently and quickly, information that is given to it
6. Make information about companies and other bodies available to the public as soon as practicable

ASIC’s priorities therefore include ensuring that investors and financial consumers are confident and informed, promoting fair and efficient financial markets and ensuring efficient registration and licensing.

ASIC administers the following functional areas through specific legislations:

Australian Financial Services License (AFS)

ASIC administers the Financial Services Reform Act 2001 that introduced a single licensing regime for all financial services and products. This piece of legislation was later incorporated into chapter 7 of the Corporations Act 2001.This legislation requires those who carry on a business of providing financial services to hold an Australian Financial Services (AFS) licence. An AFS licence is required for entities that:
• Provide financial product2 advice3
• Deal in a financial product
• Make a market for a financial product
• Operate a registered managed investment scheme
• Provide a custodial or depository service
• Provide traditional trustee company services

The obligations of an AFS licensee, as mandated by law, include:

• Obligation to ensure that financial services offered are provided efficiently, honestly and fairly
• Obligation to meet adequate financial requirements (e.g. solvency and cash obligations) to provide financial services and to carry out supervisory arrangements
• Obligations to meet compliance and risk management requirements if the licensee is not a APRA-regulated body
• Obligation to maintain competence to provide financial services (both technological and human resources)
• Obligations of monitoring, supervising and training of authorised representatives in order that they comply with the financial services laws
• Conduct and disclosure obligations
• Obligation to manage conflicts of interest
• Obligation to establish and maintain dispute resolution (internal and external) mechanisms
• Obligation to have prescribed compensation and insurance arrangements
• Obligation to comply with requirements set out by ASIC from time to time

In the next post in this series, we will focus on the conduct and disclosure obligations that need to be met by all AFS license holders and its implications for providers and consumers of financial services.


1 – http://fsi.treasury.gov.au/content/FinalReport.asp
2 – As pre Corporations Act 2001, Chapter 7.1, Div 3,“For the purposes of this Chapter, a particular facility that is of a kind through which people commonly make financial investments, manage financial risks or make non cash payments is a financial product even if that facility is acquired by a particular person for some other purpose”.
3- Financial product advice
is a recommendation or a 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 class of financial products.