By Jayanth Srinivasan, IFMR Mezzanine

Continuing our series of posts on Consumer Protection, this post represents the first part in a two part series that charts out the historical evolution of the various sources of consumers’ rights in India today.

Overview

The consumer protection regime in India may be said to rest on four individual “pillars” – namely, (a) the common law; (b) assorted statutes; (c) the Consumer Protection Act, 1986; and (d) financial product specific regulations; each of whose means of enforcement ultimately tie together in the formal courts of law.

An overview of all applicable categories is depicted below, with timelines indicating their development:

Jurisprudence

Before delving into the concrete pillars of the consumer protection legal regime, it is worth noting that certain principles underlie all aspects of consumer protection by virtue of India’s legal system having its historical basis in the “common law” – an organically built up body of legal rules and principles in England from the 12th century onwards. Specifically these are:

a. Caveat emptor

Age-old principle of law where buyers in commercial transactions are “to beware” ie. the onus lies upon them to ascertain the sanctity of the product. This rule has, over the years, become subject to disclosure requirements imposed on sellers, as well as to any other warranties / guarantees the seller may provide

b. “Justice, equity and good conscience”

In the words of one legal commentator, “its meaning is obscure and is as variable as the colour of a chameleon. It is the convenient phrase to put into a statute to fill the gaps in the law. Thus, if, in deciding cases, the courts can obtain no help or guidance from legislative enactments or religious law books or other authorities, the Judges are expected to act in accordance with justice, equity and good conscience. This usually means what each judge thinks best to do in the particular case.”

However, as of this writing, there is no “white paper” or “state of the sector position paper” or any such analogous document authored by any of the wings of government in India summarising the existing legal position on the applicability of these generic legal principles to specific questions of consumer protection.

Historical Evolution

It is useful to disaggregate the study of the evolution of the different sources of consumer protection laws into four timeframes:

a. pre – 1950
b. 1950 – 1986
c. 1986
d. 1986 – present

Pre-1950

Prior to 1950, issues of consumer protection (albeit not dealt with as “consumer protection” but under the relevant legal heads) were dealt with under the technical rules built up in the English common law. The common law evolved at least three distinct heads of law that are relevant to consumer protection in India even today: (a) tort; (b) contract; and (c) fiduciary laws. Enforcement takes place through suits filed in courts of law.

Torts are “civil wrongs”. There exists several types of torts, each with a “test” laid down and refined by courts of law in England (and subsequently in India) over the years. Torts typically open to aggrieved customers include “deceit”, “fraud”, “misrepresentation” and “negligence”, depending upon the facts of the matter. Any individual may sue a provider under these heads in trial court, with relief granted usually in the form of restitution or monetary damages. A customer may also potentially sue the manufacturer or main service provider himself under the vicarious liability rule (“master servant” rule).

Contracts are agreements between two or more parties, setting out their respective rights and obligations in exchange for “consideration” (ie. payment or such). Contracts may be written or verbal, and include express as well as “implied” terms (including the commercial principle of caveat emptor). Consumers aggrieved during the purchase of any goods or services may seek redress in trial court, with relief granted usually in the form of monetary damages. A customer may also potentially sue the manufacturer or main service provider himself under the vicarious liability rule (“principal agent” rule).

Fiduciary responsibilities arise in specific situations where sellers are deemed to be in a position of trust with respect to consumers (for instance, wealth management advisors and consumers), consequently becoming answerable to a higher set of responsibilities. Consumers may sue sellers who owe them a fiduciary responsibility in trial court.

The structure of the system of courts is as follows:

1950 – 1986

In the years since its creation in 1950 by the Constitution of India, the Union Parliament has passed several legislations that include consumer protection provisions in their body. The ambit of these provisions is restricted to the subject matter of these statutes, and they are enforceable through the trial courts. Failure on the part of any customer to show the statute was applicable meant that he had to then resort to tort / contract / fiduciary law for relief.

An illustrative list of product specific legislations with consumer protection components is as below:

a. Drugs Control Act, 1950
b. Prevention of Food Adulteration Act, 1954
c. Essential Commodities Act, 1955

1986

In 1986, the Union Parliament passed the landmark Consumer Protection Act [“COPRA”] which not only was the first generic customer protection law enacted in India covering goods and services falling under all categories (as opposed to the earlier set of individual statutes covering specific products) but also set up a separate chain of courts specifically for their enforcement.

The structure of the system of consumer courts is as follows:

The proceedings at these courts are summary in nature and statutorily applicable penalties includes punitive damages. Further, they decide the case within 3 months from the date of receipt of notice by opposite party. Amendments made to the COPRA in 1991, 1993 and most importantly in 2002 have strengthened the powers of these courts – under the last amendment, provision now exists for attachment and sale of property of a person not complying with the order.

Recent developments in the historical evolution of India’s consumer protection regime, specifically the creation of product-specific regimes for regulation of financial products and services, and the attendant consequences for consumers falling in those categories, as well as on going regulatory overhauls shall be considered in the second part of this two-part blog entry.

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.

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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

By Darshana Rajendran, IFMR Finance Foundation

Continuing our series of posts on Consumer Protection, this post studies an important South African legislation aimed at consumer protection and also looks at the overall landscape for consumer recourse in the South African Financial Services sector.

Financial Advisory and Intermediary Services (FAIS) Act

One of the important legislations regulating the financial services industry in South Africa is the Financial Advisory and Intermediary Services Act. This Act seeks to regulate the provision of financial services and advice. The FAIS Act can be summarised to have three distinct components: One is the licensing conditions that a financial services provider must adhere to, second is the codes of conduct which lay out best practices for the industry and the third is the appointment of the Ombudsman for Financial Services Providers.

Licensing: In terms of this Act, nobody is allowed to render financial services as a regular feature of his/her business without being authorised as a financial services provider or appointed a representative of an authorised provider. In order to obtain this authorisation, the Act demands that a person or organisation seeking to provide financial services or advice must comply with, among other requirements, the ‘fit and proper’ requirements which include:

- Honesty and integrity
- Competency
- Operational ability
- Financial soundness

In addition, financial advisors have come under increased scrutiny, with the Financial Services Board (FSB) introducing examinations which test advisors on their knowledge of products and regulations governing the financial services industry.

Codes of Conduct: The FAIS Act also sanctions codes of conduct for financial services providers. The codes of conduct can be categorised into the general code of conduct which is applicable to all financial services providers and other codes of conduct, applicable to specific financial services providers rendering financial services in respect of specific financial products. These codes of conduct regulate the conduct of financial services providers and their representatives in the rendering of financial services. The codes of conduct ensure among other obligations, that the financial services providers and their representatives make the necessary and relevant disclosures to clients in order to enable the clients to make informed decisions on the financial services rendered.

Dispute Resolution: The Act makes a provision for the appointment of an Ombudsman for Financial Services Providers, or the FAIS Ombudsman to consider and dispose of complaints by clients against financial service providers in terms of the FAIS Act. The Financial Services Ombudsman Scheme Act (FSOS Act) further extended the jurisdiction of the FAIS Ombudsman through enabling the FAIS Ombudsman office to addresses cases against financial institutions where no other ombudsman has jurisdiction and to take a decision where uncertainty exists over jurisdiction. Contraventions of the Act which may be referred to the FAIS Ombudsman include providers conducting business using unauthorized persons (representatives who are not ‘fit and proper’) as well as non-compliance with Codes of Conduct and relevant Regulations.

Landscape for Consumer’s Recourse in South Africa’s Financial Services Sector

Apart from the Ombudsman for Financial Services Providers (FAIS Ombudsman), there are several other voluntary Ombudsmen created by the financial services industry who also deal with financial disputes, which makes the landscape for customer recourse confusing. We look at overall ombudsman system in South Africa in a little more detail.

Apart from the FAIS Ombudsman, another statutory scheme is that of the Pensions Fund, created in terms of the Pensions Funds Act. Apart from the statutory schemes, there are four voluntary schemes that are recognized by Financial Services Ombudsman Schemes Act (the FSOS Act), which was in fact introduced as a compromise to a super ombudsman in an attempt to simplify, standardise and co-ordinate the dispute resolution landscape in South Africa. Complaints against financial institutions that do not fall within the jurisdiction of the four voluntary schemes or where there is uncertainty over jurisdiction will fall under the jurisdiction of the FAIS Ombudsman.

The four voluntary Ombudsman schemes recognised by FSOS Act are:

• The Ombudsman for Long-term Insurance (the OLTI)
• The Ombudsman for Short-term Insurance (the OSTI);
• The Ombudsman for Banking Services (the OBS); and
• The Credit Ombudsman (the CO).

Avenues for consumer recourse in South Africa’s financial services sector

A few important features common to the voluntary schemes recognised by FSOS Act:

• The consumer is not obliged to make use of the scheme concerned, but may instead sue the industry member in court. If the consumer does make use of the scheme he will in any event not be bound by a determination (ruling) by the ombudsman, but will still retain the right to sue the industry member in court.
• A determination is binding and as such enforceable, however, on the industry member.
• The ombudsman enjoys security of tenure, and may not be dismissed for being unpopular with the industry members, or because of dissatisfaction with the office’s recommendations or determinations. The ombudsman is therefore able to act independently and objectively, taking instructions from no-one.
• The ombudsman seeks to resolve disputes by conciliation, mediation or recommendation, failing which by determination.

References:
1. The Financial Advisory and Intermediary Services (FAIS) Act, 37 of 2002
2. Landscape for Consumer Recourse in South Africa’s Financial Services Sector, FinMark Trust, 2007

By Darshana Rajendaran, IFMR Finance Foundation

Continuing our series of posts on Consumer Protection, this post looks at the approaches to financial regulation and supervision and studies the financial regulatory structure of South Africa.

It is commonly understood that regulation should be designed to achieve certain key policy goals, including: safety and soundness of financial institutions, mitigation of systemic risk, fairness and efficiency of markets and the protection of customers and investors. In practice there are essentially four approaches to financial regulation and supervision that achieve these policy goals in different ways. G30 report, 2008ⁱ defines these approaches as follows:

1. Institutional Approach:

The Institutional or Silos Approach is a legal-entity-driven approach. The firm’s legal status determines which regulator is tasked with overseeing its activity both from a prudential and business conduct perspective. In other words, this approach follows the boundaries of the financial system in different sectors and each sector is supervised by a different agency. Examples: China, Mexico and Hong Kong

2. The Integrated Approach

Under the Integrated or Unified Approach, there is a single universal regulator that conducts both safety and soundness oversight and conduct-of-business regulation for all the sectors of the financial services business. Example: Germany

3. The Twin Peaks Approach

The Twin Peaks Approach is a form of regulation based on objective and refers to a separation of regulatory functions between two regulators: one that performs the safety and soundness supervision function and the other that focuses on conduct-of-business regulation. Examples: Australia and Netherlands

4. Functional Approach

The Functional Approach is one in which supervisory oversight is determined by the business that is being transacted by the entity, without regard to its legal status. Each type of business may have its own functional regulator. Examples: France, Italy and Spain

The South Africa Financial Regulatory System

The regulatory regime in South Africa in the 1980s regarded the financial sector components – banks, insurance and capital markets as separate species. An institutional approach was in place, characterised by lack of coordination among regulators of these specific components. In 1987, the De Kock Commission pushed the process of deregulation and a shift towards a functional approach of regulating specific activities. The process of deregulation, with more reliance on market forces started to gain momentum in the 1990s. After South Africa’s political isolation ended in the mid-1990s, the country quickly adjusted to international standards and consumer protection issues moved more to centre stage. Following the 1993 Melamet Commission, South Africa planned to move towards a single regulator approach to be in line with developments in European countries whose financial systems are similar. However, the regulatory system has remained functional and partially integrated to the present day.

Presently, the two main regulatory authorities are the South African Reserve Bank (SARB) and the Financial Services Board (FSB). The deposit-taking banking sector is regulated by the Banking Supervision Department of the SARB while non-banking financial institutions are regulated by the FSB. In addition, there is also a National Credit Regulator whose objective is to promote fairness in accessing consumer credit, consumer protection and competitiveness in the credit industry. It presently does not have an overarching coordinating authority.

In 2008 the International Monetary Fund (IMF) and the World Bank performed a Financial Sector Assessment Program (FSAP) whereby they conducted a joint assessment of the South African financial system. The main outcome from the IMF team was that although South Africa had a modern and effective financial regulatory framework, it nevertheless needed reform that prioritize and strengthen both prudential and market conduct supervision and regulatory powers.ⁱⁱ

In order to address the shortcomings identified by the IMF, the Government issued the National Treasury Policy Documentⁱⁱⁱ in February 2011 that set out proposals for strengthening the financial regulatory system. The main policy thrust was the adoption of the twin-peak model of financial regulation in South Africa. It was in part recognition of the fact that there was a global shift from the single regulator model to the twin peak model after the crisis. The twin peaks approach was regarded as the optimal means of ensuring that transparency, market integrity, and consumer protection receive sufficient priority. It was believed that moving to a twin peaks system would cause the least amount of disruption to both market participants and to the regulators themselves

South Africa’s twin-peak model will be underpinned by three pillars – coordination, prudential regulation and market conduct of business. The Council of Financial Regulators comprising heads of key financial regulators, non-financial regulators and other stakeholders will ensure overall coordination of financial regulation. It will also serve as a formal channel for resolving conflicts that inevitably arise from separating prudential and market conduct regulation. The Financial Stability Oversight Committee comprising the South African Reserve Bank (SARB), the Financial Services Board (FSB) and National Treasury will coordinate financial stability issues and endeavour to mitigate risks. The South African Reserve Bank (SARB) will be responsible for prudential regulation while the Financial Service Board (FSB) will regulate the conduct of business. South Africa intends to phase in the system over a three year period.

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i) ‘The structure of financial supervision: Approaches and challenges in a Global Marketplace’, G30 Report, 2008.
ii) IMF Country Report 2008
iii) ‘A safer financial sector to serve South Africa Better’, Department of National Treasury, South Africa, February 2011
Other References:
‘Financial Regulation And Supervision: Theory And Practice In South Africa’, International Business & Economics Research Journal, November 2011
‘Financial Regulation in South Africa’, SA financial sector forum, 2001

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.

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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