Week 7: Investing in Financial Products - PowerPoint Presentation

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Week 7: Investing in Financial Products - PPT Presentation

Questions clarifications RMIT University 2 This weeks readings Chapter 9 Regulation of the Financial Services Industry Chapter 10 Conduct and Disclosure in the Investment Advisory Process ID: 794865

rmit financial client advice financial rmit advice client 2013 university

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Slide1

Week 7:

Investing in Financial Products

Slide2

Questions / clarifications

RMIT University

Slide3

This week’s readings

Chapter 9 Regulation of the Financial Services Industry

Chapter 10 Conduct and Disclosure in the Investment Advisory Process

RMIT University

Slide4

Learning Objectives

Identify the rules and regulations relating to financial advisers -

What are their duties and obligations to clients?

Identify and explain the rules relating to what financial advisers must adhere to in giving financial advice

Interpret relevant sections of the CA, ASIC Act and common law decisions

Apply this law to financial investment situations

Slide5

The Regulatory Approach

Chapter 7 of the Corporations Act

Financial Services Reform Act 2001

(Cth)

Aim was to improve the regulation of the financial services industry.In 2012 Ch 7 was further amended by

the Labor government to tackle conflicts of interest within the financial planning

industry see

the Future of Financial Adviser Reforms (FoFA)

This was subsequently amended by the Liberal government in the

Corporations Amendment (Financial Advice Measures) Act March 2016 which softened some of the

reforms

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Slide6

Why is it important to regulate financial advisers and service providers?

http

://www.abc.net.au/7.30/content/2015/s4226316.htm

Slide7

What does Chapter 7 regulate?

The provision of financial services

Conduct in relation to financial products

The offer and sale of financial products

The operation of financial markets

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If you carry on a business of providing financial services you must hold an

Australian Financial Services Licence

or be an authorised representative (e.g. employee).

Where do you get this licence?

Slide8

Key questions

To determine if a person is required to have an Australian Financial Services Licence, we must address the following questions:

Is it a Financial Product? s763A

Is the person providing a Financial Service? s766

Is the person carrying on a financial services business? s761A

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Slide9

Q1: What is a financial product ?

Section 763A(1)

states that:

A financial product is a facility through which, or through the acquisition of which, a person does one or more of the following:

makes a financial investment

manages

financial risk

makes

non-cash

payments

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Slide10

What is a financial investment ?

The investor makes a financial investment if they give money

another person and

it is intended that a financial return or benefit will be generated and the

investor does not have the day-to-day control over the use of the

money: s

763B CA

Examples ?

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Slide11

What is a financial risk ?

A person manages

financial risk

if they manage the financial consequences to them of particular circumstances happening or avoid or limit the financial consequences of fluctuations in, or in the value of, receipts or costs (including prices and interest

rates): s736C CA.

Examples

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Slide12

What are non-cash payments ?

A person makes

non-cash payments

if they make payments other than physical delivery of Australian or foreign currency, either notes and or

coins: s 763D CA.Examples ?

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Slide13

Slide14

Q2: Is the person providing a financial service?

Section 766A CA provides that a

person is providing a financial service if

they:

providing financial product advice (see s 766B CA),

dealing

in a financial product (see s 766C CA),

making

a market for financial product (see s 766D CA),

operating

a registered scheme,

providing

a custodial or depository service (see s 766E CA),

engaging

in a prescribed conduct.

This

topic will focus the provision of

financial product advice

and dealing in a financial product.

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Slide15

Definition of providing financial product advice

Financial product advice under

s 766B CA

means a recommendation, a statement of opinion, or a report of either that:

is intended to influence a person in making a decision in relation to financial

products

; or

could

reasonably be regarded as being intended to have an influence

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Slide16

Exclusions from financial product advice

Under

s 766B(5) CA

the following activities are excluded from financial product advice.

Advice by lawyer about matters of law.A lawyer may talk about the legal issues relating to the product but not about the product itself.

He or she

may point out the legal issues relating to the product

Registered tax agent

giving advice in the ordinary course of

his/her

business and is reasonable necessary. A registered tax agent may talk about the taxation implications of the income that flows from the investment and the capital gains implications when it is sold but not about the appropriateness of the product to the client.

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Slide17

Personal or general financial advice ?

The provision of financial advice is either personal or

general:

s 766B(2)

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Why is the distinction important ?

Can you think of some real life distinctions between the two?

Slide18

Personal Advice

where

the financial adviser has considered one or more of the objectives, financial situation and needs of the client

a reasonable person might expect the financial adviser to have considered these matters

(

see s 766B(3)CA)

Slide19

General advice

any financial product advice that is not personal advice

(

see s 766B(4)CA).General advice does not take into account an investor’s particular

circumstances,

objectives, financial situation and needs.

Slide20

Slide21

Slide22

Is this a personal or general advice?

Jenny sees a financial planner, Peter, for investment advice. She tells Peter her goal is to invest for retirement and she wants a low-risk investment.

Peter gives a seminar to a group of 100 potential investors about the benefits of investing in

Westpoint

Slide23

https://www.moneysmart.gov.au/investing/financial-advice/types-of-financial-

advice

https

://www.youtube.com/watch?v=

FHZIU0cWALU

Slide24

Q3: Is the person carrying on a financial service business?

What is a

financial

service

business?

is defined in

s 761A CA

as a business of providing financial services

.It is important because a person must be licensed if the person is carrying on a financial services business see s

911A CA

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Slide25

What is the difference between a retail client and wholesale client?

Why is the distinction

important

because Chapter 7 provides additional protection to retail clients, based on the rationale that, in general,

retail clients are less well informed about risks in financial products than wholesale clients.

For

example,

retail clients must be provided with more disclosure than wholesale clients

a client a retail client or a wholesale client?

-> Look at the type of product.

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Slide26

Retail v wholesale table

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See page 492 of your textbook.

Slide27

What if the client enters into contracts with an unlicensed provider?

The client may

rescind

the agreement within a reasonable time but this may not be available if the agreement has been affirmed or the client is aware that the adviser is not licensed or a third party rights are affected.

The

court may in this situation grant partial rescission per ss 925A-925D CA.

The agreement is unenforceable against the client and the unlicensed provider is unable to recover any fees per s 925E CA.

The

client is entitled to recover any moneys already paid to the unlicensed person per s 925H CA.

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Slide28

What other duties do financial advisers have ?

Common Law

ASIC Act

Corporations Act

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Slide29

Common Law

Negligence

–

Donoghue v Stevenson

(1932) (obligation to take reasonable care to avoid foreseeable risk of loss or damage)Negligent statements:

Hedley Byrne v

Heller

[1964]

MLC v Evatt (1968)

Shaddock

Parramatta

(1981)

WE WILL COVER THIS IN DETAIL IN WEEK 8

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Slide30

ASIC Act protections

The

ASIC Act

2001

(Cth) also contains provisions that regulate the behaviour of financial advisers. These provisions are contained in:SS 12CA, CB, CC

which relate to

unconscionable conduct,

S 12DA which relates to

misleading and deceptive conduct,S 12DB which relates to false or misleading representations

, and

S 12ED which relates

to due care and skill; fitness for purpose

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Slide31

What does unconscionable conduct mean?

“A person must not, in trade or commerce, engage in conduct in relation to financial services if the conduct is unconscionable within the meaning of

the unwritten law

…”

S 12CA ASIC ActUnwritten law refers to non-statutory law

Slide32

Commercial Bank of Australia v Amadio (1983)151CLR447

Facts

Mr and Mrs A’s son convinced them to become guarantor for a business loan he was seeking from the CBA.

A guarantor is someone who agrees to pay the debts owed by another person if they fail to pay.

The bank issued the loan.

Mr and Mrs A were elderly and had poor comprehension of English/

The bank failed to explain the consequences of becoming a guarantor for their son’s loan.

Mr and Mrs A weren’t told to get independent legal advice

Nor were they told their son’s financial position was very weak.

When the business failed the bank demanded that Mr and Mrs Amadio pay for their son’s loan,

Slide33

Amadio (cont.)

Held

The HC held the Bank had acted unconscionably by not providing full and accurate information and by taking advantage of Mr and Mrs A’s poor English.

The contract was found to be void- unenforceable

Mr and Mrs A were released from paying the debt.

Slide34

3 elements of unconscionability

The weaker party must have been under a special disability so that there was no real equity between the parties

The stronger must have been aware of that special disability

It must have been unfair or unconscionable for the stronger to procure agreement in the circumstances in which it was procured

Slide35

s12CB ASIC Act

Prohibits unconscionable conduct in relation to financial services that are ordinarily acquired for

Personal

Domestic or

Household use

Slide36

To determine if there is unconscionable conductthe court may take into account:

The relative strengths of the bargaining positions of the supplier and consumer

Whether the consumer was able to understand any documents relating to the supply or possible supply of the services

Whether any undue influence or pressure was exerted on, or any unfair tactics were used against the consumer

See s12CB

(2)

Slide37

What is misleading and deceptive conduct? s12DA ASIC Act

‘

Misleading’ means it leads into error an ordinary person who is likely to hear or read it’

The court will view the matter objectively and ask

Would a reasonable person be misled or deceived?

The court is not concerned with whether the defendant believed the conduct was misleading or deceptive

Slide38

Examples of misleading and deceptive conduct

Withholding information

Making false predictions

Creating a false impression

Giving false guarantees

+ 1 = 3

Slide39

Ali v Hartley Poynton Ltd (2002)

The stockbroker P promised the client about 15-20% returns could be achieved.

The client subsequently lost the whole investment

The court found P liable for misleading and deceptive representation.

Slide40

What are the specific conduct and disclosure rules for Financial Advisers?

From 1 July 2013 the Future of Financial Advice Act (FoFA) applies which states that financial advisers

must act in the best interest of the client.

CA s961B(1)

Slide41

The provider satisfies the duty in s961B(1) if the provider has does each of the following:

(a) identified the objectives, financial situation and needs of the client that were disclosed to the provider by the client through instructions;

(

b) identified:

(

i) the subject matter of the advice that has been sought by the client (whether explicitly or implicitly); and

(

ii) the objectives, financial situation and needs of the client that would reasonably be considered as relevant to advice sought on that subject matter (the

client's relevant circumstances

);

(

c) where it was reasonably apparent that information relating to the client's relevant circumstances was incomplete or inaccurate, made reasonable inquiries to obtain complete and accurate information;

(

d) assessed whether the provider has the expertise required to provide the client advice on the subject matter sought and, if not, declined to provide the advice;

(

e) if, in considering the subject matter of the advice sought, it would be reasonable to consider recommending a financial product

(

i) conducted a reasonable investigation into the financial products that might achieve those of the objectives and meet those of the needs of the client that would reasonably be considered as relevant to advice on that subject matter; and

(

ii) assessed the information gathered in the

investigation

(f) based all judgements in advising the client on the client's relevant circumstances;

(

g) taken any other step that, at the time the advice is provided, would reasonably be regarded as being in the best interests of the client, given the client's relevant circumstances

Slide42

Reason for introduction of the Best Interest Rule

Storm Financial Collapse

Storm advised clients to mortgage their homes and invest in the share market using risky margin loans.

When the market fell by more than 50% investors’ margin loans were called up (margin call) leading to massive financial losses.

http://www.abc.net.au/7.30/content/2012/s3647529.htm

Slide43

What documents must be provided to clients by financial advisers or licensee

The documents that must be provided to a retail investor are

Financial Services Guide (FSG)

Statement of Advice (SOA)

Product Disclosure Statement (PDS)

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Slide44

Conflict of interest

The licensee must have in place adequate arrangements for the management of conflicts of interest see s 912A(1)(aa)

Slide45

Example of conflict of interest

Product issuer A provides a high commission to a financial planner.

Product B provides a low commission to a financial planner but is more suitable for the client than product A.

QUESTION

Which product would the financial planner be tempted to recommend?

Where there is a conflict of interest there must be disclosure in the SOA and FSG.

Slide46

Soft Dollar Benefits can also constitute a conflict of interest

The terms is used to define benefits provided by the financial institution the financial adviser has placed the client’s money with. Includes things like

Entertainment

Invitations to conferences

GiftsMarketing support payments

Sponsoring adviser activities

Slide47

Slide48

Financial Services GuideA FSG is a document that contains basic information that any retail client is entitled to

receive: s

941 A

Must be given

before the financial service: s 941Dhttps://www.westpac.com.au/docs/pdf/pb/

Financial_Planning_Broch.pdf

Slide49

FSG Content: s 942B

Name

and contact details of entity,

kinds

of financial services provided, commissions

relationships

between entity and issuers of financial

products

Slide50

Statement of AdviceThis is a document detailing the advice given, the reasons and other information including remuneration paid or payable to the financial adviser.

A SOA should be provided when

a retail client is given

personal

adviceSection 946A CA

Slide51

Content of Statement of Advice

The SOA must contain:

information about client’s circumstances

descriptions of the range of products/strategies considered

a statement setting out the advice, and reasons why advice is

appropriate

the

name and contact details of providing entity

information about fees, commissions or associations that might have affected the advice

Section 947B CA

prescribes the contents

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Slide52

Product Disclosure Statement

The PDS is a document to inform the retail client about the product and to promote the understanding of the client.

also allows a comparison of financial products and helps the client make an informed choice.

The

PDS must be provided when the personal financial advice includes a recommendation that the client acquire a particular financial product

Part 7.9 of the Corporations Act CA

https://www.unisuper.com.au/~/media/files/forms%20and%20downloads/pds%20documents/accumulation%201/unis000008-accumulation-1-product-disclosure-statement.pdf

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Slide53

Contents of PDS

Overview:

Name and contact details of issuer

Significant benefits

Significant risks

Cost of the product

Commission

Characteristics or features of product

Tax implications

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