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Overview of Financial Services Law
FIN -112
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Overview of the Regulatory System
Under this heading the regulatory framework for the banking industry, including governing legislation and industry regulators such as APRA (Australian Prudential Regulation Authority), ASIC (Australian Securities and Investments Commission), the ACCC (Australian Competition and Consumer Commission) and the RBA (Reserve Bank of Australia) will be reviewed. Chapter 7 of the Corporations Act (Financial Services and Markets), dealing with financial products, will be briefly reviewed.
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What is the financial system?
Savers Borrowers
Direct InvestmentLoans secured or unsecuredPromissory NotesBills of Exchange
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What is the financial system?
Savers Borrowers
Indirect InvestmentBank depositsEquitiesCorporate BondsFund managers
Financial Intermediaries – Financial Financial Intermediaries – Financial Service ProvidersService Providers
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Financial Service Providers Building Societies, credit unions General Insurance Companies List Corporations
(shares) Fund Managers Super and Investment Schemes ASX Broker Superannuation Funds Finance Companies Banks
Purposes of Financial Services LawIn a capitalist society financial services could
be left to market forces to be regulated or the law could be used to maintain, facilitate and constrain free market behaviour. The law at present has since the Campbell Committee Review of the financial system in the 1980’s been used to:
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Create commercial certainty
Increase market efficiency
Reduce business costs
Encourage investor confidence
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AUSTRALIA’S FINANCIAL REGULATORY FRAMEWORKAUSTRALIA’S FINANCIAL REGULATORY FRAMEWORK is vested in four separate agencies:the Australian Prudential Regulation Authority (AP;
Reserve Bank of Australia
The co-ordinating body for these 4 agencies is the Council of Financial Regulators.
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AUSTRALIAN PRUDENTIAL REGULATION AUTHORITY - APRA
APRA regulates
1. deposit-taking institutions (banks, building societies and credit unions) as well as friendly societies,
2. life and general insurance and
3. superannuation
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APRA Enabling Legislation
Australian Prudential Regulation Authority Act 1998
Commonwealth Authorities and Companies Act 1997 ('CAC')
Corporate Law Economic Reform Program Act 1999
APRA is charged with regulating financial institutions and for developing administrative practices and procedures (e.g. prudential standards), in a manner that:
balances financial safety and efficiency,
competition, contestability and competitive neutrality.
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APRA and Insurance Regulation
Purpose of legislation to protect the interest of policyholders.
APRA’s powers to:License insurers;Make prudential standards; Issue enforceable directions; Inspect insurers to ensure compliance.
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Administers and enforces a range of legislative provisions relating to financial markets, financial sector intermediaries and financial products, including investments, insurance, superannuation and ADI activities and as from 2010 credit services activities.
ASIC’s aim is to: protect markets and consumers from manipulation,
deception and unfair practices; promote confident participation in the financial system by
investors and consumers; promote honesty and fairness in company affairs and
securities and futures markets through adequate and timely disclosure of market information.
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ASIC ASIC seeks to achieve its aims by:
developing policy and guidance about the laws that it administers;
licenses and monitors compliance by participants in the financial system; and
provides comprehensive and accurate information on companies and corporate activity.
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As part of its consumer protection role, ASIC monitors and assesses compliance with:the Code of Banking Practice the Credit Union Code of Practice; the Building Society Code of Practice; the Electronic Funds Transfer Code of
Practice; and the National Credit Act.
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ASIC and the Financial Services Reform Act 2001 ASIC regulates the financial services industry
through licensing, ensuring disclosure and that the participants conduct as financial service providers, is as prescribed.
ASIC is empowered to advise the Minister on licensing matters. It is also required to undertake assessments of the compliance of market and facility licensees with their legislative obligations, and to take enforcement action where necessary.
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ASIC and the Financial Services Reform Act 2001 The Financial Services Reform Act 2001
introduced a single licensing regime for Australian financial markets and clearing and settlement facilities.
Licensees (such as the Australian Securities Exchange) have primary responsibility for the operation of markets and of clearing and settlement facilities; the ‘responsible Minister’ (currently the Treasurer) has overall responsibility for licensing such entities.
ASIC and the National Credit Act As from July 2010 ASIC will regulate
consumer credit
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Reserve Bank Of Australia’s –Role
to maintain the stability of the financial system – Mandate confirmed after 1998 restructure
focuses on the prevention of financial disturbances with potentially systemic consequences
Is not a guarantor Uses monetary policy to achieve its goals
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Treasury is responsibile for advising the Government on financial stability issues and for the legislative and regulatory framework underpinning financial system infrastructure. It provides advice to the Government on policy processes and reforms that: promote a secure financial system and sound
corporate practices; remove impediments to competition in product and
services markets; and safeguard the public interest in matters such as
consumer protection and foreign investment.
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Council of Financial RegulatorsMembers are comprised from:
Operates as an informal body where members share information and views, about regulatory issues (especially, where responsibilities overlap) and, if the need arises, co-ordinate responses to potential threats to financial stability.
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Financial Services Providers
Financial Services Laws APRA Corporations Law Common Law contract Negligence Equity –fiduciaryrelationship
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Financial Services Providers
s932B prohibits use of terms unless a person has the proper license:Share or stock broker Insurance broker
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MARKET MISCONDUCT AND OTHER REQUIREMENTS -
Regulation of conduct associated with financial products and services: Dealing with client’s money Unconscionable conduct Prohibition on share hawking Market manipulation Mislead and deceptive conduct Insider trading
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Overview of Conduct Requirements Pt 7.8 Corporations Act
Pt 7.8 requires AFSL holders to: Have & keep separate accounts for all clients Where they hold client assets to periodically
provide statements to them Keep financial records explaining their transactions To prepare profit & loss statements, balance
sheets and have them audited and report to ASIC Not behave unconscionably in the provision of
financial services
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Licensees dealings with Client’s Money
Licensees dealings with Client’s Property
Reporting Obligations
General Conduct RulesInsurance
Financial records,Statements & audit
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Licensees deals with Client’s money – (other than loan funds) Division 2 Pt 7.8 Must create and keep separate accounts for
each client showing money received by Licensee to purchase financial products
Accounts only to record clients money, interest and investment proceeds
Money must be paid into the account immediately or next business day at the latest.
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Money of Clients limited meaning
s981A(1) Money paid by client,
by a person acting on behalf of a client or for the benefit of a client in regarding a financial service or financial product
s981A(2) ≠ Fees of the AFSL Loan money Money deposited with
AFSL for a deposit product
Reimbursement to AFSL of money paid for a Financial product
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Money paid into account s981B Account must be with an
ADI; Approved foreign bank; Cash management trust
Regulations set out operation of account eg Must operate account as a trust account reg 7.8.01(5)
& s981B(1)(c) Only use money for financial product approved by
client reg 7080(2) Money in account protected no set off or other
attachments permitted
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Accounts if AFSL terminated
Regulations under s981F deal with money in account of insolvent AFSL or merger of firmsAs money is held on trust money belongs to
client
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Loan Money – s982A
Must be placed into an account until; AFSL issues client statement under s982C
& Product Disclosure & receives written acknowledgement of receipt from client
AFSL must only use loan money for the purpose set out in the s982C statement
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Powers of Court: s983A -983B
Where there are shortfalls, refusals or delays in paying from an account Court mayMake a number of orders in relation to
accounts including Freezing accounts Orders requiring payment of money Requiring AFSL to make full disclosure of accounts
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Powers of Court: s983A -983B
Court can only make these orders: Upon an application from ASIC If the accounts have money that can be
frozen Repayment can be ordered
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Licensees dealing with Client’s Property – Division 3 Pt 7.8s984A
AFSL accountable for client’s property received in connection with the provision of a financial service or financial product
Property [assets ≠ money] (shares, Commercial paper)
AFSL must only deal with property as instructed by the client – s984B(1)(b)
Property is held on trust for the client & if request deposited with an ADI
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Insurance Premiums received by AFSL AFSL must pay insurer first day instalment
due by client Once paid insured clients liability to insurer
discharged (whether received by insurer or not)
Payment by insured to AFSL for client not a discharge for insured if AFSL takes money
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AFSL Reporting Obligations s986A and Pt 7.8 Div 5 Must provide
periodic statements to clients concerning Loan money;Property or funds held on trustDerivates trading of client
s989A and Pt 7.8 Div 6 Must annually give ASIC copies of audited P&L & Balance SheetFor company within 3 mths of FY end others 2
mths of FY end
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AFSL financial records, statements & audit- Pt 7.8 Div 6 AFSL must have and keep financial records that
correctly record and explain the transactions and financial position of their financial services business – s988A
Show profit & loss statement, Balance sheet Are audited In english In Australia
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Information must be sufficient to: Show all money received and paid s981B,
s982B All financial products bought and sold by clients
and which clients All income from financial products for each client All assets and liabilities of the AFSL All securities of the AFSL All underwriting transactions reg 7.8.11 &
s988E(g) All property held in trust for clients reg 7.8.11 &
s988E(g)
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General Conduct Rules
General Conduct Rules
Priority to Clients Orders – s991BPriority to Clients Orders – s991B
Regs to deal thru Licensed markets Regs to deal thru Licensed markets – 991C– 991C
Dealings with Non- licensees – Dealings with Non- licensees – s991Es991E
Dealings with Employees – s991F Dealings with Employees – s991F reg 7.8.21reg 7.8.21
Hawking – s992AHawking – s992A
No Unconscionable Conduct– s991ANo Unconscionable Conduct– s991A
Misleading or deceptive conduct Misleading or deceptive conduct – – s1041Hs1041H
Common Law Conduct rules Common Law Conduct rules
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AFSL’s Special Relationship
Broker – client in fiduciary relationship when expertise held out and advise given
Daly v Sydney Stock Exchange Ltd (1986)
No fiduciary relationship when broker just executes orders from client
Option Investments (Aust) Pty Ltd v Martin [1981] VR 138
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Australian Securities and Investments
Commission v Preston [2005] FCA 1805 Preston did not hold an AFSL Preston gave advice to people regarding how they should deal with their
superannuation benefits. Preston contacted people with existing benefits in superannuation funds. They were advised that their financial interests would best be served if they
established a self managed superannuation fund into which their existing benefits could be "rolled over".
They were led to believe that establishing such a fund was a straightforward exercise and relatively inexpensive.
On a client taking the advice, Preston had the client sign an authority to which the client’s existing superannuation benefits were to be rolled-over into a trust account established by Preston.
The client was also asked to sign an authority permitting Manito to deduct its fees from the amount received.
Preston would then forward the remaining amount to the client. Preston collected more than $77,658 on behalf of clients. Preston did not, account for the relevant amounts in all cases. Despite repeated
requests, many clients did not recover any of their superannuation benefits.
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ASIC v Preston
9 This conduct which, in one way or another, was repeated in respect of at least 30 clients, contravened the ASIC Act and the Corporations Act in at least the following respects. First, by representing to clients that their superannuation benefits could be used in any way they wished and that the moneys would be paid into and administered through a trust account (as stated on one of the forms signed by clients), the company breached s 1041E of the Corporations Act. Section 1041E prohibits the making of statements (or the dissemination of items of information) which are false or misleading and which is likely to induce a person to dispose or acquire a financial product. A self managed superannuation fund is a "superannuation interest" under the Superannuation Industry (Supervision) Act 1993 (Cth) (see ss 10, 17A) and is deemed to be a "financial product" for the purposes of the Corporations Act by s 764A (1)(g).
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ASIC v Preston
10 Second, by failing to inform clients about restrictions on the use of existing superannuation benefits rolled-over from a superannuation fund, as well as the various management and compliance requirements -- in particular the need for a trustee to be appointed to a self managed fund -- the company breached s 1041H of the Corporations Act and s 12DA of the ASIC Act. Those sections prohibit misleading or deceptive conduct in relation to financial services and, in the case of the Corporations Act, financial products.
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ASIC v Preston
11 The company also engaged in unconscionable conduct in contravention of s 12CB of the ASIC Act. Such conduct not only included the various misrepresentations and omissions in relation to superannuation benefits and self managed superannuation funds, but also the advice given to clients encouraging them to establish a self managed fund when it was not in their interests to do so in light of both the skills and expense required to establish and maintain the fund. Further, the company behaved unconscionably when it failed to pay to clients the benefits received on their behalf and when, in some instances, it mixed clients’ moneys with its own funds and applied them for its own use
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Giving Priority to orders of clients
s991B requires AFSL’s to give priority to act on orders of clients to buy and sell financial products
AFSL’s should not buy or sell the financial products directly from clients due to conflict of interest. Exceptions apply
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Regulations to Deal through licensed markets (local & foreign) s991C requires AFSL’s to deal through
licensed markets for financial products. As s991 requires AFSL’s to keep records
fail to comply can be revealed
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Dealings with Non-licensees s991E
s991E requires AFSL’s not to deal on their own behalf with non-licensees who hold financial products if such financial products can be traded on a licensed market.
Eg AFSL must not buy BHP shares direct from a third party off market only via the ASX
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Dealings with Employees s991F
Unless the regulations otherwise authorise AFSL’s and employees must not jointly acquire a financial product
An AFSL must not give credit to an employee or any associate of an employee (ADI’s not subject to this rule)
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Hawking s992A
Hawking the act of offering to trade financial products from unsolicited meetings with a person
Hawking is directed at preventing unsolicited direct marketing calls or meetings or other conduct prescribed by regulation to sell financial products
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Hawking ASIC Guide 2002/20059 The hawking prohibitions will be breached if:(a) the offeror makes an offer to issue or sell a financial
product (which includes inviting an application for their issue or sale);
(b) the offer is made in the course of (ie during), or because of, a meeting with or telephone call to a client or potential client (“consumer”); and
(c) the meeting or telephone call is unsolicited. Note: There are some exemptions to the hawking prohibitions: see paragraphs A6.1 and A7.1–A7.3 in the Q&A
section following. Both s992A and 992AA require proof of mental elements (eg recklessness and intention) in order to establish a criminal contravention of the provision. Section 736 stipulates that it is a strict liability offence, so there is no mental element for a breach of that section.
10 The prohibitions in s992A and 992AA apply only to offers that are made to retail clients. The prohibition in s736 does not apply where the relevant offer is made to sophisticated or professional investors: s736(2)(a) and (b).
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Misleading or deceptive conduct – s1041E&H Corporations Act , s12DA-12DB ASIC Act s1041E prohibits a person making false or
materially misleading statements likely to induce people to trade in a financial product
Breach is an offence under s1311(1)
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s1041H Misleading or deceptive conduct (civil liability only)
1) A person must not, in this jurisdiction, engage in conduct, in relation to a financial product or a financial service, that is misleading or deceptive or is likely to mislead or deceive.
2) The reference in subsection (1) to engaging in conduct in relation to a financial product includes (but is not limited to) any of the following: a) dealing in a financial product; b) without limiting paragraph (a):
i. issuing a financial product;ii. publishing a notice in relation to a financial product; iii. making, or making an evaluation of, an offer under a takeover bid or a
recommendation relating to such an offer; iv. ……………(superannuation and retirement savings)x. carrying on negotiations, or making arrangements, or doing any other
act, preparatory to, or in any way related to, an activity covered by any of subparagraphs (i) to (ix).
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s1041H juxtaposed s52 TPA
s1041 H modeled on s52 of the TPA s52 considered by High Court in Fraser v
NRMA Holdings Ltd (1995) 13 ACLC 132
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What actions may be misleading or deceptive conduct What actions may be misleading or deceptive conduct
Actual deception Half truths Product puffery Silence Promises & Predictions Erroneous assumption
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Half-truth cases examples
Porter v Audio Visual Promotions Pty Ltd (1985) ATPR 40-067Porter induced to subscribe for shares in a
“million dollar company with paid up capital of $750,000”.
Capital was $10,000 cash balance bonus share issue from asset revaluation of goodwill
Representation while true was misleading or deceptive
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Silence case examples
Fraser v NRMA Holdings Ltd (1995) Prospectus misleading and deceptive due to
what it did not say regarding the loss of entitlements to road service if demutualization took place
NRMA Holdings Ltd v Morgan (1999) 31 ACSR 435
Henjo Investments Pty Ltd v Collins Marrickville Pty Ltd
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Product Puffery case example General Newspapers Pty Ltd v Telstra Corporation (1993) ATPR 41-
274“in the ordinary course of `commercial' dealings, a certain degree of `puffing' or exaggeration is to be expected. Indeed puffery is part of the ordinary stuff of commerce."
Hanave Pty Ltd v LFOT Pty Ltd [1998] 1051 FCA – Moore J The first matter is the newspaper advertisement. It seems to me very
difficult to allege that a newspaper advertisement which is designed primarily to tell people that a house is open for inspection should be construed as giving information other than preliminary information upon which a person should rely in order to enter into a contract. If one expects puffery anywhere it would be in such a newspaper advertisement. Although Lee, J in Paper Sales (Australia) WA Pty Ltd v PSA Pty Ltd (1991) ATPR 41-142 at 53,051, left open the possibility that `an ordinary member of the class of persons to whom the conduct is directed may fail to discern that representations about the advertised product are to be disregarded, I think ordinarily an advertisement which merely directs someone to enquire about the product is not expected in trade or commerce to be relied upon as a quasi representation.
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Promises & Prediction cases
s769C provides that a representation concerning a future matter will be taken to be misleading if the person making the representation does not have reasonable grounds for making the representation
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What Conduct Can Be Misleading?Misleading conduct can occur in any business communication, such as: advertising, brochures, commercials tenders telephone conversations business proposals ....in fact, just about anywhere
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Other Consumer Protection Provisions in Corporations Act s1041F prohibits a person from inducing another
to deal in financial products by knowingly or recklessly making false, misleading or deceptive statements, promises or forecasts
Dishonest Conduct s1041G Corporations Act Harassment or coercion s12DJ ASIC Act Pt 7.7 Financial Services Disclosure & Pt 7.9
Financial Product Disclosure contain provisions against misleading conduct concerning issuing disclosure documents
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Common Law Conduct Rules
Contractual Misrepresentation Tort of deceit Negligent Misstatement Unconscionable conduct
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Contractual Misrepresentation
Innocent Fraudulent Negligent Where the representee can sue the representor
as the representation formed part of the contract which the representee relied upon as a basis for entering the contract.
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If term of If term of contractcontract
DamagesDamages
RescissionRescission
Third Party Third Party RightsRights
RestitutionRestitution AffirmationAffirmation
Must be fact not Must be fact not Opinion or pufferyOpinion or puffery
Contractual Misrepresentation
MisrepresentationMisrepresentation
Intention thatIntention thatit be acted it be acted upon upon
Real Real InducementInducement
Reliance Reliance Inducement toInducement tocontractcontract
RemediesRemediesIf not termIf not termof contractof contract
TerminationTerminationIf breachIf breachseriousserious
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Tort of Deceit The Elements Statement of Fact Statement of Fact
not opinionnot opinion
Known to be Known to be false false Or Or Reckless Reckless disregarddisregardto whether to whether true or nottrue or not
$$$$$$$$$$$$LossLoss
Subjective Test Subjective Test Difficult to ProveDifficult to Prove
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Negligent Misstatement Elements
Duty of CareDuty of Care
Reasonable man testReasonable man testTo determine relianceTo determine reliance
ReasonableReasonablepersonpersonOr Or Reasonable Reasonable skilled personskilled persontesttest
Reliance on Reliance on knownknownOr apparent Or apparent expertiseexpertise
AFSLAFSLintends intends client client to replyto reply
$$$$$$$$$$$$LossLoss
Breach of duty /Breach of duty /Standard of careStandard of care
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Insider Trading trading in securities or engaging in related activity by
someone in possession of price or value sensitive information who knows or ought to know that that information is not generally available. The definition is very broad in scope.
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Insider Trading
Covers persons in a prior relationship with a body corporate the source of the information, eg director or officers of the body, or someone with a substantial shareholding in that body corporate or a related body corporate: "corporate insiders“ and persons who at the material time occupied other positions that would have given them access to price sensitive information, such as officers of substantial shareholders or persons with business or professional relationships with such a body corporate or employees of such persons. These persons, plus "corporate insiders".
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Covers persons with no connection with the body corporate and with no relationship with someone with such a connection. It could include a person who overheard a conversation involving a corporate insider
a person who as a market intermediary, such as a securities analyst, benefited from special disclosure by the body corporate's officers in the course of a research visit to its premises. It could include a person such as a market intermediary who became aware of information with no corporate source at all, such as an impending sell or buy order of substantial size.6 In the latter case, such a person might be called a market insider if his or her relationship to market trading processes gave that person access to that information.
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Insider Trading
cover one who gains information of the sort the market insider might have without a connection to the market, as by coming across it accidentally; for example, a person who overhears the corporate insider's conversation. It is also capable of including a person planning a substantial purchase of securities of the body corporate, as in the run-up to a takeover bid. However, the Corporations Law provides an exclusion from part of the s 1002G prohibition for this sort of situation.
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The concept of insider trading in the Corporations Act in its current form does not focus on any connection with the body corporate, either securities of which are being traded, or conduct in relation to which is being engaged in. Nor is the Division centred on any relationship with the person with whom any trading took place. The Division does not focus on the source of the information, except to the extent of a person's own trading intentions, as indicated. In fact, it is not relevant for the purposes of that concept whether or not the person concerned was motivated to trade by the information possessed.
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Insider Trading – Who is an insider? A person who A person who
PossessPossess
Information about a financial productInformation about a financial product
Which is not generally available and it it wereWhich is not generally available and it it were
A reasonable person would expect it to have a A reasonable person would expect it to have a Material effect on the price or value on thatMaterial effect on the price or value on that
Financial product Financial product
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Does the Does the Insider Insider have the have the requisite requisite mental mental StateState
Did the insider Did the insider
Know or oughtKnow or oughtTo have knownTo have knownThat the That the Information Information Was not Was not Generally knownGenerally knownAnd had a materialAnd had a materialEffect on the price Effect on the price of the financialof the financialproductproduct
If yesIf yes
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Has the prohibitedHas the prohibitedConduct Occurred?Conduct Occurred?
Apply for, acquire Apply for, acquire Or Dispose or agree Or Dispose or agree to Apply Or dispose to Apply Or dispose of itof it
If yesIf yes
Did the person concerningDid the person concerningA financial productA financial product
Procure Procure another another Person Person to so doto so do
Communicate the Communicate the Information knowing orInformation knowing orOught to have known thatOught to have known thatThe other would use itThe other would use itTrade in the financial Trade in the financial productproduct
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A breach of the A breach of the insiderinsider
Trading prohibitions Trading prohibitions Has occurredHas occurred
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Insider Trading & Chinese Walls
You can contract out as the case shows.You can contract out as the case shows.
