As noted in our previous article, a statement of advice is the main document that records advice provided to retail clients.

The advice process

Individuals obtain information about financial products in a variety of ways and in a variety of settings. An individual may talk to friends and family, their lawyer, their accountant and others who they trust when considering a financial product.

Where advice is sought from a financial advisor, a financial services guide (FSG) will typically be provided to a client in the first meeting between the client and advisor. A statement of advice (SoA) will then either set out the advice or record the advice that was given. If the statement of advice is not itself the means by which advice is provided, then it must be provided to the client when the advice is provided or as soon as practicable thereafter.

If the statement of advice is not given to the client when the advice is provided, the licensee or representative must inform the clients of information which would be required to be included in the statement of advice including a disclosure of remuneration or other benefits that the providing entity and its associates will receive in connection with the advice, and must disclose interests which may affect the recommendations within the advice.

Regulatory Guides

There are a number of Regulatory Guides and reports that have been published by ASIC and which assist advisors in understanding their obligations. These include:

• Regulatory Guide 90: Example Statement of Advice: Scaled advice for a new client (RG 90).
• Regulatory Guide 168 Disclosure: Product Disclosure Statements (and other disclosure obligations) (RG 168).
• Regulatory Guide 175 Licensing: Financial product advisers— Conduct and disclosure (RG 175).
• Regulatory Guide 221 Facilitating digital financial services disclosures (RG 221).
• Regulatory Guide 244 Giving information, general advice and scaled advice (RG 244).
• Report 413 Review of retail life insurance advice (REP 413).

Mandatory inclusions

The statements and information in a statement of advice must be worded and presented in a clear, concise and effective manner (see s947B(6) and 947C(6) and RG 175). ASIC recognises that “the style, content, layout and length of an SoA will vary depending on various matters, including the scope and complexity of the advice.”

Section 947B of the Corporations Act 2001 sets out the required content of a statement of advice provided by an advisor. The statement of advice must include the following:

• A statement setting out the advice (see s947B(2)(a) and 947C(2)(a));

• Information about the basis on which the advice is or was given. This information should include an explanation of the basis on which the advice is or was given including consideration of the clients objectives, financial situation and needs and how the advice will meet those objectives, financial situation and needs (see s947B(2)(b) and 947C(2)(b));

• A statement setting out the name and contact details of the advisor (see s947B(2)(c) and 947C(2)(c)–(d));
• Information about remuneration, including commissions or other benefits, that the advisor, a related body corporate, a director or employee of the advisor or any related body corporate or associate will receive that might reasonably be expected to be or have been capable of influencing the advisor in providing the advice (see s947B(2)(d) and 947C(2)(e));
• Information about any other interests, whether pecuniary or not and whether direct or indirect, of the advisor including any associate, that might reasonably be expected to be or have been capable of influencing the advisor in providing the advice (see s947B(2)(e) and 947C(2)(f));
• A statement setting out any warnings required to be given to the client in relation to the advice pursuant to section 961H; and
• All other information required to be provided under the regulations. Regulation 7.7.11 provides that a statement of advice given by a financial services licensee must include information about all remuneration, including commission and other benefits, that a person has received or is to receive from referring another person to the licensee.

Disclosures on fees and commissions

The obligations relating to the disclosure of information on commissions, fees, benefits or other advantages provided to an advisor or an advisor’s associate aim to help consumers identify any potential influences on the advice provided and to identify any potential conflicts of interests.

In terms of how a disclosure may be made, preference is given to an advisor stating a dollar amount received, otherwise a percentage amount or a written description must be provided, and the benefits disclosed must include all commissions, soft dollar remuneration, sales quota and volume bonuses. A financial services provider would generally not need to disclose holdings of shares in a company whose shares are recommended to an investor unless the advice provided is likely to result in a significant volume of trading in those particular shares. If there is some form of collateral benefit, i.e. an advisor or associate is a lender to the corporation in which securities are recommended, disclosure is likely to be required.

An advisor must include a reasonable level of detail in their recommendations and also in relation to the disclosure of interests that may affect the advice given.

Recommending one product to replace another

Where an advisor recommends that a client disposes of a particular product to replace it with another, additional obligations apply.

Section 947D(1) requires that a statement of advice include information as to the charges a client will or may incur with respect to that disposal, reduction, acquisition or increase, along with any pecuniary or other benefits that the client will or may lose as a result of acting on the recommendation, to the extent that the information is known or could reasonably found out by the advisor.

Financial advice is regulated under the Corporations Act 2001 (Cth) as financial product advice. The provision of financial product advice is a financial service and a financial planner or adviser must hold an Australian Financial Services Licence (AFS Licence) or operate under an exemption to this licensing requirement.

Financial advisors and AFS Licence holders are subject to general licensing obligations including relating to conduct and disclosure as well as additional obligations for financial advisers who provide financial product advice to retail clients.

In this post, we introduce the types of advice given, the topics typically covered by advice and the regulatory framework.

Types of financial product advice

Under the Corporations Act there are two types of financial product advice. These are:

• personal advice which is defined as financial product advice that is given or directed to a person in circumstances where the provider of the advice has considered one or more of the person’s financial objectives, situation and needs, or a reasonable person might expect the provider to have considered one or more of these matters. Personal advice can also be further classified as either scaled advice meaning personal advice is limited in scope, relating to a specific issue or specific range of issues raised by a client or comprehensive advice providing holistic or full advice covering a client’s financial needs.
• general advice which is financial product advice that is not personal advice. General advice covers guidance, advertising, promotional and sales material highlighting the potential financial benefits of a product.

Financial product advice generally involves a qualitative judgement, evaluation, assessment, or comparison of the features of a financial product.

Main topics covered by financial advice

The main areas covered by financial advice include the following:

• Superannuation and retirement advice: referring to advice that seeks to help individuals plan for their retirement.
• Loan and investment advice: advice related to the determination of the most suitable loan product and financial asset allocation for a consumer.
• Self-managed superannuation fund advice: typically concerning advice provided to support the investment and administration’s decision is made by the trustee.
• Tax advice: relating to financial product advice liabilities, obligations and entitlements that could arise under a taxation law.

Legal and regulatory framework

There are a number of sources of regulatory obligations for AFS licensees and their representatives. These include:

• General common law duty of care: the adviser may be subject to an implied duty of care and can be liable in negligence.
• Contractual: where advice is provided pursuant to a contract there will be contractual duties and an advisor may be liable for a breach of contract where it fails to abide by the terms of the contract.
• Fiduciary duties: fiduciary duties will apply where the relationship between the parties is fiduciary in nature. Fiduciary duties include the no conflicts and no profit rules.
• AFS licensing requirements: the AFS Licence will include a number of obligations on the licensee.
• Corporations Act 2001 (Cth): there are various obligations in the Corporations Act 2001 (Cth) including s 912A that need to be considered. There are also obligations in relation to a licensee’s dispute resolution system and mandatory disclosures.
• Australian Security and Investments Commission Act 2001 (Cth): including prohibitions against unfair contract terms, unconscionable conduct, misleading or deceptive conduct, and containing implied warranties.

In our next post, we will consider mandatory inclusions of a statement of advice.

As we noted in our previous article there are five parts to form FS01. Below we describe these in more detail.

Part A of the application requires you to provide details of the applicant as well as details of the person who will serve as a contact for the applicant during the application process. In part A you will also be asked questions about the financial services and products you would like to be authorised to provide and how your proposed business will operate. ASIC makes various references to the Corporations Act 2001. As noted in our previous article, applicants should ensure that they understand the applicable provisions of the Corporations Act and understand the controls that they will implement to ensure compliance.

Who can apply for an AFS licence

An applicant for an AFS licence can be an individual, partnership, company, trustee of a trust, or other entity. If you are applying for a company, the names and details of your directors and secretaries will be pre-filled by the online application form. If you are applying as an ‘other’ type of entity, you may be asked to provide more information in an A1 additional proof. We will explain the proofs that are required to accompany an application in an article to follow. An AFS licence cannot be held by the trust but can be held by a trustee.

The applicants’ contact person will be contacted by ASIC with any questions about the application lodged. The contact person can be the applicant, one of the applicant’s officers or employees or another person such as a lawyer or accountant.

Financial Service and Product selection

At Part A3 and A4 you will be asked to select the financial services and products that you want to be authorised to provide and your AFS licence. ASIC notes that this is one of the most important steps in the application process. The implications of a selection include that it will limit the financial services and products that can be provided under the licence and that it will determine the obligations you have as an AFS licensee. The proofs that you are required to provide include those that demonstrate that you have the competence, resources and processes in place to be able to provide the services and products that you have selected.

The financial services that you may select include those listed below:

• provide financial product advice;
• deal in a financial product;
• make a market for a financial product;
• operate a registered scheme;
• provide a custodial or depository service;
• provide traditional trustee company services;
• provide a crowdfunding service.

Financial product advice may either be:

personal advice as defined in section 766B(3) of the Corporations Act 2001. You will generally be considered to be giving personal advice if you have considered, or a reasonable person might expect you to have considered, one or more of the client’s objectives, financial situations and needs; general advice as defined in section 766B(4) of the Corporations Act 2001. This covers all financial product advice that is not personal advice.

Class of product advice as defined in regs 7.6.01BA(3), 7.6.04BA(3), 7.8.12A(2), and 7.8.14B(3). This includes financial product advice about a class of products that does not include a recommendation about a specific product in the class.

In our next article, we will examine these terms in more detail.

Regulatory guides are published by ASIC to give guidance to regulated entities by explaining when and how ASIC will exercise specific powers, to explain how ASIC will interpret the law, to describe principles underlying ASIC’s approach, and to give practical guidance describing the steps of a process such as applying for a licence. If you want to understand how to obtain an AFSL, read on.

Free Assessment of Whether you are ready

Simply provide your details below to arrange an online interview to determine your readiness for an AFSL. We will contact you within 1 business day.

Financial Services

Regulatory guide one gives practical guidance to applicants for an Australian financial services licence (AFS licence). An AFS licence authorises you and your representatives to provide financial services to clients. Without an AFS licence, you generally can’t carry on a financial services business.

Financial services are provided if you:

• provide financial product advice;
• deal in a financial product;
• make a market for a financial product;
• operator registered scheme;
• provide a custodial or depository service;
• provide traditional trustee company services; or
• provided crowdfunding service.

Main considerations in AFS Licence applications

ASIC assesses applications for AFS licences as part of its role as the regulator of the financial services industry. ASIC considers whether an applicant is competent to carry on the kind of financial services covered by the license, has sufficient financial resources to carry on the business that is proposed, has an adequate risk management system in place, and can meet other obligations under the AFS licence.

How to obtain an AFSL: The process

An applicant for an AFS licence must complete an application consisting of form FSO1 and supporting core proof documents. Before beginning work on an application, an applicant must understand the business and understand which financial services and products are proposed to be provided and must understand the obligations of an AFS licensee and have appropriate systems and processes in place.

As part of the application process, an applicant must choose the authorisations that it requires as detailed in part two of the AFS Licensing Kit. The choice must be based on the authorisations that will be required, not on those that may be required at some point in the future. If an AFS licence holders’ business changes, it must vary its license at that point in time.

The application form itself is found online and as an applicant completes the online form, it will tailor itself so that only those questions relevant to the applicant are shown. In order to get access to the online form, an applicant will need to register for the elicensing system.

There are five parts to the online application and these are:

• Part A where you enter your details as the applicant and the details of a contact person. Here you will also select the financial services and products that you want to be authorised to provide answers to questions that give a description of your business.
• Part B where you will be asked questions that relate to the obligations you will have as an AFS licensee and your ability to comply with them.
• Part C which will display where complex financial services or products have been selected in Part A. Part C will include more detailed questions about those services.
• Part D which will include declarations and certifications based on your answers in Parts A and B.
• Part E which will include the core proof documents to send as part of the application.

Once you’ve completed the form you can print a draft of it for checking. It is a criminal offence to make a false or misleading statement in the application. The system will calculate the relevant fee to be paid.

When you submit the form, you must immediately send ASIC:

• a scanned and signed print out of the form and copies of the proof documents; and
• a cheque by post if you haven’t already paid the application fee by BPAY.

There is no set timeline for approval of an AFSL. The length of time that an AFS licence takes to be approved will depend upon the completeness of the original application including the description of the applicant’s business and how quickly the applicant responds to requests for information from ASIC.

Corporations Act 2001 requirements

AFS licence holders are required to comply with a range of obligations under the Corporations Act. Importantly, these include obligations under section 912A and section 912B. In understanding and complying with these obligations, prospective licensees should develop an obligations register which sets out all of the applicable obligations and specifies controls for each.

Proof documents

As part of an application for an AFSL, an applicant will need to provide proof documents. The number and type of proof documents will depend on the complexity of the financial services and products that are proposed to be offered.

The four core proof documents you will need to include in your application include:

• A5 business description;
• People Proofs for each responsible manager;
• B1 organisational competence including a table of organisational competence and if relevant submission on the responsible managers’ competence; and
• B5 financial statements and financial resources unless you’re regulated by APRA.

In our next article, we will consider the contents of proof documents in further details alongside the obligations of an AFSL holder.