The Commonwealth Treasury


PROPOSED LEGISLATIVE FRAMEWORK

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CHAPTER 4: FINANCIAL PRODUCT DISCLOSURE

4.1 KEY POINTS

— Point of sale disclosure requirements; and
— Availability of further information on request.

4.2 IMPORTANCE OF DISCLOSURE

Disclosure regulation is at the core of any regulatory scheme to protect consumers as it enhances consumers ’ ability to assess financial products and make informed decisions. Effective disclosure obligations must promote the production and provision of relevant and useful information at the point of sale of a financial product which consumers can effectively use to assess the features of a product and decide whether a product meets their needs. Currently, participants in Australia ’s financial markets face a range of information disclosure rules which vary greatly in their status, degree of prescription and penalties for breach.
Submissions were generally supportive of harmonised and consistent disclosure obligations. Many noted the need to develop flexible obligations which could apply to a range of financial products and that it would be undesirable to introduce prospectus type requirements to products which do not warrant that level of disclosure. A wide range of views were expressed as to whether a general disclosure test, a specific list or a combination of both should be adopted. Some submissions also noted the need to distinguish between the information needs of retail and wholesale clients.
The disclosure obligations will only apply to transactions which involve retail clients [55] and will not extend to transactions involving wholesale clients.

4.3 POINT OF SALE DISCLOSURE

This paper puts forward two alternative models for regulating point of sale disclosure. Comments are sought on these alternatives.

Alternative A

The disclosure obligations contained in this alternative will apply to financial products [56] including:
Securities will continue to be subject to the requirements contained in Parts 7.11 and 7.12 of the Corporations Law. [57]
This alternative draws on recent research which has explored ways of helping consumers make better informed decisions. It seeks to avoid the production of disclosure documents containing excessive and complex information which may confuse consumers and discourage them from using the document. This alternative is designed to promote comparability across a range of products by identifying the matters which a disclosure document should contain.
Product issuers will be required to disclose the following information in a financial product information statement (FPIS) where that information is relevant to the particular product being offered:
  1. Information to identify the product issuer;
  2. Characteristics, features or nature of the product including the rights, terms, conditions and obligations attaching to the product; [58]
  3. Expected benefits which a consumer will receive;
  4. The risks associated with the product;
  5. Details of all amounts payable in respect of the product (including any amounts by way of initial and ongoing fees, commissions or charges) and the point at which the amount is payable; [59]
  6. Internal inquiry and complaints handling mechanisms and external alternative dispute resolution procedures;
  7. Taxation considerations;
  8. Cooling off arrangements;
  9. The availability on client request of further information and the nature of that information;
  10. The date or version of the FPIS or supplement;
  11. Any other material information which is known to the issuer and which is not required to be disclosed under items 1 - 10 above but which may reasonably influence a client’s decision to acquire the product.
— This is not intended to require product issuers to undertake a due diligence exercise.
A product issuer [60] need not disclose information which potential clients may reasonably be expected to know. [61]
A summary of information may be included at the front of the document. The summary will be subject to the prohibition against misleading or deceptive statements and material omissions.
The point of sale disclosure requirements identify those items which are considered necessary for the decision making process. The requirements are intended to be flexible and apply to all financial products and cater for their varying attributes.
Where a particular item listed above is not relevant to a product, there is no need for the FPIS to mention the item. To ensure that the disclosure regime applies appropriately to individual products or classes of products, ASIC will have an exemption and modification power. [62] It is expected that ASIC would only exercise these powers after consultation with industry and consumer representatives. The use of such powers will allow the point of sale requirements to be set in a flexible, timely and consistent way. In addition, ASIC may provide guidance as to matters of formatting in order to promote more readily comparable disclosure.

Information available on request

In addition to point of sale disclosure, retail clients and financial service providers may request that the product issuer make available any information which the issuer has made public, or is required by regulation to be disclosed. Upon a request being made, the product issuer will be required to give a copy of the information to the client or make it available for inspection. A product issuer will not be required to disclose internal working documents or other confidential information.

Impact of this approach

Consistent with CLERP 6, the disclosure regime proposed ensures that disclosure obligations are consistent across financial products other than those products which must comply with the disclosure requirements specified in section 1022 of the Corporations Law. Offers of securities for issue or sale will need to comply with the section 1022 disclosure requirements. Other financial products will be required to comply with the disclosure obligations outlined above.
One consequence of this is that the disclosure requirements applying to managed investments, superannuation and life insurance with an investment component will differ. However, comparability of these products will be promoted through the use of short form prospectuses and profile statements on the one hand and the FPIS on the other hand. While the legal obligations applying to these products will differ, the disclosure received by the consumer will be comparable.

Alternative B

An alternative approach to the disclosure obligations outlined above is to bring managed investments, superannuation and life insurance with an investment component within the same regulatory framework. This would be achieved by bringing superannuation and life insurance with an investment component within the fundraising provisions contained in Part 7.12 of the Corporations Law. [63]
Under this approach, information may be made available to a retail client via a point of sale document. Further information will be available to a client in a prospectus prepared by the product issuer and lodged with ASIC. It is expected that the retail client would usually invest on the basis of a simpler point of sale document (rather than a full prospectus) which could incorporate the prospectus by reference.
Another feature of this approach is that issuers of relevant superannuation and life insurance products would, upon commencement of the CLERP Bill , have available to them options such as profile statements and offer information statements. [64]
As with Alternative A, ASIC would be provided with powers of modification and exemption to enable it, in consultation with relevant parties, to provide detail on the disclosures required for particular kinds of products. In this way timely adjustments could be made to the disclosure requirements.
The disclosure requirements outlined in Alternative A would apply to financial products other than securities, superannuation and life insurance with an investment component.

4.4 RETAIL CLIENTS MUST BE GIVEN DISCLOSURE DOCUMENTS

A financial service provider or a product issuer, before recommending or arranging for the provision of a financial product, will be required to give a retail client an up-to-date disclosure document prepared by the product issuer. The person who has contact with a retail client must give the client the document. A financial service provider or product issuer need not give a client an up-to-date disclosure document if they believe on reasonable grounds that the client has already received one.

Group schemes

The requirements to provide a point of sale disclosure document will apply to group insurance and superannuation schemes. Product issuers and financial service providers will be required to ensure as far as reasonably practicable that prospective beneficiaries under a group policy receive the disclosure document or other information prescribed by regulation.
A regulation making power will be available to require specified persons to provide certain information in relation to certain classes of products. This regulation making power may apply in a variety of contexts although it specifically anticipates the commencement of the Government ’s Choice of Superannuation Fund legislation. Upon commencement of that legislation an obligation mirroring the Choice requirements for employers to give employees disclosure documents may be imposed via this regulation making power. [65]

4.5 UPDATING THE FINANCIAL PRODUCT INFORMATION STATEMENT

Where there has been a material change in information contained in an FPIS, a financial service provider or product issuer may not recommend or arrange for the provision of a financial product unless an up-to-date FPIS or a supplement which clearly identifies the changes to the FPIS has been given to a retail client; or the financial service provider or product issuer believe on reasonable grounds that an up-to-date FPIS or supplement has already been given to the client.

Ensuring a client has an up-to-date FPIS

The mechanisms by which product issuers ensure that a product is issued pursuant to an up-to-date FPIS will be the subject of the issuer ’s commercial arrangements and arrangements with financial service providers. It is intended, however, that by requiring the FPIS or supplement to contain a date, providers will be able to identify the document pursuant to which a client has based their decision to acquire a financial product.

4.6 MODIFYING THE DISCLOSURE RULES

To ensure flexibility in the application of the disclosure rules, the regulations may:
— For example, interim contracts of general insurance or cover notes will be exempted from the FPIS requirements under this power. These contracts can be entered into by a retail client before the client has received an FPIS. However before the client can enter into a final contract of insurance, an FPIS will need to be given to the client;
In addition, ASIC will be given a power to exempt a person from the disclosure requirements or modify the application of the disclosure requirements.

4.7 ADVERTISING AND PROMOTIONAL MATERIAL

Advertising or promotional material will be subject to a general prohibition against misleading and deceptive conduct.
Advertisements or promotional material relating to specific products should include a statement that an FPIS is available from the product issuer or through a financial service provider.
A reference to an FPIS will not be necessary where an advertisement or promotional material:
However, where the advertisement or promotional material is likely to encourage a retail client to acquire a specific financial product, a reference to the availability of the FPIS will be required.
Publishers will be given an exemption from liability where they publish an advertisement or make a statement in the ordinary course of business and did not know or have reason to believe that the publication would contravene these rules. [66]

4.8 CONFIRMING TRANSACTIONS

Retail clients should receive confirmation of any transactions they enter into in relation to financial products. The objective of this requirement is to allow clients to confirm the terms and conditions of the transaction into which they have entered.
Product issuers will be required to confirm a transaction entered into with a retail client or set up a facility for a retail client to confirm transactions. It is envisaged that this obligation may be satisfied by product issuers in a variety of ways; for example, issuing a client with a bank deposit book, a life or other insurance company issuing a policy or other document, or by providing a telephone or internet confirmation service which consumers can access.
The regulations may vary this obligation and prescribe specific parties other than the product issuer on whom the obligation to confirm transactions may fall. The regulations may also prescribe the mechanism for confirmation which should apply in specific circumstances. For example, the regulations may specify requirements for provision of contract notes for derivatives.
The information which should be provided or made available to the client includes, where relevant:
Consistent with proposals regarding electronic contract notes, where a client agrees, confirmation of a transaction may be provided in electronic form.

4.9 PERIODIC CLIENT STATEMENTS

Periodic reporting obligations will also apply to financial products which contain an investment component, other than securities.
Information regarding client ’s benefits will need to be given to retail clients at least annually in respect of products including: superannuation, life insurance which contains an investment component, and products offered by authorised deposit-taking institutions (ADIs). It is envisaged that ADIs can satisfy these obligations by continuing their current practices of giving clients regular statements. The periodic reporting requirements will not apply to products such as risk insurance and derivatives.

4.10 ONGOING DISCLOSURE OF MATERIAL MATTERS

Information concerning significant events or material changes which may affect any of the matters required to be disclosed under the FPIS must be given by the product issuer to existing clients so that the client can understand the nature of the event or change. Where possible, the information should be provided before the event, or as soon as possible after the event and in any case within three months after the event. In the case of changes to fees and charges, the client should be given at least three months ’ prior notice of proposed increases.
Consideration will be given to the recommendations contained in the Companies and Securities Advisory Committee ’s Report on Continuous Disclosure [67] in relation to continuous disclosure obligations for securities.

4.11 ALTERNATIVE DISPUTE RESOLUTION

Product issuers who prepare disclosure documents must be party to an external alternative dispute resolution (ADR) scheme approved by ASIC and have in place internal dispute resolution procedures to deal with disputes and complaints arising regarding the financial product to which the document relates.
This is intended to ensure that ADR requirements apply to all product providers regardless of whether or not they hold a financial service providers licence. The requirement is consistent with existing requirements in the insurance industry.

4.12 REMEDIES AND LIABILITY

Product issuers and, where relevant, directors will be both criminally and civilly liable for misleading and deceptive information contained in, and omissions from, the FPIS, a supplement or other information required to be prepared.
An issuer or director will be criminally liable where they knowingly or recklessly offer or issue a financial product pursuant to an FPIS which they know contains a misleading or deceptive statement or omits material information and the statement or omission is materially adverse from the point of view of the retail client.
Defences to both criminal and civil liability will be available. These defences will complement the nature of the disclosure obligations. [68]
In addition, product issuers [69] and financial service providers will be civilly liable for misleading and deceptive conduct in relation to dealings in financial products and the provision of financial services. This prohibition will be modelled on section 995 of the Corporations Law.
Liability will also be imposed on product issuers and financial service providers where there is a failure to give a retail client disclosure document. The person (whether a product issuer or financial service provider) who deals directly with a retail client has the obligation to give the client the disclosure document. [70] Liability for a failure to fulfil this obligation will fall on the person who has had contact with the client. Where a client deals with both a product issuer and financial service provider and both parties fail to give the client the disclosure document, both will be jointly and severally liable.
Where an authorised representative was the party dealing with the retail client and was therefore under the obligation to give the client the disclosure document but failed to do so, the responsible licensee will be liable for the representative ’s failure. This is consistent with responsibilities imposed on licensees for the conduct of their representatives. [71]

Court orders

Where there is a misleading or deceptive statement in, or an omission from:
the court, on the application of ASIC, will have power to require that specified information be disclosed to the public or promotional material containing certain information be issued by the product issuer in the manner specified.

4.13 ASIC STOP ORDERS

ASIC will have power to issue stop orders where there is a misleading and deceptive statement in, or an omission from, an FPIS, a supplement, other disclosure material required to be prepared or any advertising or promotional material.
An order may be made which prevents product issuers and financial service providers recommending or arranging for the provision of a financial product while the order is in force.
Stop orders will be served on the product issuer. In the case of financial service providers, it may be appropriate for ASIC to issue a global stop order applying to these parties. It is proposed that a defence to liability will be available to financial service providers who continue to engage in conduct covered by the stop order but who can establish that they did not reasonably know about the stop order.
Prior to making an order, ASIC will be required to hold a hearing and provide a reasonable opportunity for interested persons to make either oral or written submissions to ASIC as to whether or not a stop order should be made.
A power to make interim stop orders will also be available to ASIC.
[55]. As defined in the Dictionary.
[56]. As defined in Chapter 1.
[57]. Proposed Part 6D.2 of the Corporate Law Economic Reform Program Bill 1998 . Note that CLERP 6 proposed that the prospectus regime for securities would be retained.
[58]. In the context of derivatives, this will require that retail clients be alerted to the fact that margin calls may become payable at short notice.
[59]. In the context of derivatives where all amounts may not be identifiable upon entering the transaction, the retail client should be informed of the amounts which can be identified as well as their obligation to pay amounts at a later stage.
[60]. As defined in the Dictionary. Note that persons who are not in the business of providing financial products will not be regarded as product issuers. In relation to derivatives traded on a market, the financial service provider will be regarded as the product issuer. However, consistent with current practice, the market operator may assist the financial service provider in meeting the disclosure obligations.
[61]. This is based on section 1022(3) of the Corporations Law (paragraph 710(2)(c) of the CLERP Bill ).
[62]. This is consistent with ASIC’s proposed powers to set more specific content requirements of a profile statement for relevant securities (for example, managed investments) – see CLERP Bill, clause 714. Note that this section also makes provision for the regulations to specify further information to be disclosed in a profile statement.
[63]. As amended by the CLERP Bill .
[64]. Note that there is a $5 million limit on the use of offer information statements.
[65]. See Part 4.6.
[66]. This is based on section 734(8) of the CLERP Bill .
[67]. November 1996.
[68]. Given that product issuers will not be subject to a due diligence obligation, the available defences will not include a due diligence defence. Liability for misleading and deceptive conduct and statements in disclosure documents is also discussed in Chapter 10.
[69]. Where a product issuer is a company, the directors will also be subject to liability.
[70]. See Part 4.4.
[71]. See Parts 2.3 and 2.7.