The Australian Government and regulators have progressively been regulating more and more financial services activities and this is particularly the case post the financial crisis. The courts have also made clear their expectations of financial advisers. Should this continue next year or should Government and regulators see whether the raft of recent initiatives, together with previous laws, will suffice?

One area that has been particularly affected is investing in retail financial products. Almost every key step in the process has been impacted by a recent initiative. We have previously commented on a number of the initiatives but as you can see from the summary below, they quickly add up.


ASIC has ramped up its focus on advertising. As ASIC states in RG 234, “consumers are heavily influenced by advertisements for financial products and financial advice services. Advertisements that do not fairly represent the financial product or its key features and risks, or the nature and scope of the advice service, can be misleading and create unrealistic expectations that may lead to poor financial decisions”. In common with other ASIC guidance, ASIC’s expectations in this area go beyond what the law requires and are more what ASIC considers would be good practice.

Offer documents

A number of ASIC regulatory guides expect disclosure against “benchmarks” for certain financial products. Recently ASIC has been setting disclosure benchmarks that not only expect disclosure over and above what the Corporations Act might require, but also expect the issuer to take actions that are beyond the issuer’s existing legal obligations under the Act. See here for more information.

Tightening up financial advice

The Future of Financial Advice (FoFA) reforms introduce a statutory best interests duty that requires a provider of financial services to act in the best interests of the client when giving personal advice. Plus a fee disclosure statement must be provided to the client annually and a renewal notice must be provided every two years. See our updates on the introduction of the first FoFA bill, second FoFA bill and passage of the FoFA Bills through the House of Representatives for more information.

The courts have also made clear their high expectations of financial advisers in the recent cases of Wingecarribee Shire Council v Lehman Brothers Australia Ltd (in Liq) [2012] FCA 1028 and Bathurst Regional Council v Local Government Financial Services Pty Ltd (No 5) [2012] FCA 1200. These high expectations were based on well-established laws such as contract and fiduciary principles rather than any retail regulatory protection. See our alerts here and here for more information.

Banning conflicted remuneration

The FoFA reforms also impose bans on conflicted remuneration. See our alerts here and here for more information on the bans.

Capital requirements for issuers and others

New financial requirements will significantly increase the current financial requirements for some licensees and require responsible entities to closely monitor the financial status of their custodians. See our updates on the new financial requirements here and here.

A suitability requirement for product issuers?

ASIC has on a number of occasions floated the idea of requiring product distributors and issuers to ensure that investment financial products are suitable for investors. For example, in its submission to the Ripoll report, ASIC suggested manufacturers and/or distributors taking some responsibility as an option for reform. This possible reform was not explicitly addressed in the Ripoll report. However, the report stated that it is the decision for individual investors in consultation with a financial adviser to determine the appropriateness of particular investment products. The report by implication might be seen as rejecting ASIC’s suggestion that manufacturers and/or distributors take some responsibility. However, ASIC continues to press industry towards suitability requirements and Parliament introduced an unsuitability test for some lending products such as margin lending.

AFMA recently released principles relating to product approval for retail structured financial products. These principles are intended to support the product development and distribution process within firms that issue retail structured financial products by clarifying the respective roles and responsibilities of the various parties involved in a manner that promotes the fair treatment of individual investors.

At what cost?

Additional regulation comes at a cost. These costs are usually eventually borne by consumers or owners of financial services businesses (e.g. superannuation funds).

In October 2012, the “Independent Review of the Australian Government’s Regulatory Impact Analysis Process” conducted by David Borthwick AO and Robert Milliner was released. The Review found that there was considerable dissatisfaction with the regulatory impact analysis (RIA) process amongst business and the not-for-profit sector, agencies, ministers and ministerial offices. The Review observed that ministers and decision makers often lack proper awareness of the RIA process and the potential that a timely and comprehensive regulatory impact statement has for providing a strong evidentiary basis for policy decisions and for mitigating the risks of the consequences of ill-informed or inappropriate regulation.

Some of the costs for the Australian economy of increasing government regulation have already become evident. It was recently reported that the big four banks shed 6,600 jobs in the last 12 months, which might in part be linked to the increased costs of complying with government regulation. Further, the World Economic Forum's Global Competitiveness Report 2012-13 ranked Australia 96th out of 144 nations for the burden imposed by government regulation, which is of concern for Australia’s productivity, economic growth and international competitiveness.

The FSC-DST Global Solutions CEO Report released on 10 December found that:

in many cases, regulations do not pass a simple cost-benefit test. Poor or unnecessary regulation imposes a greater cost on the economy than the public benefit it delivers. The financial services sector has become frustrated with regulations that deliver few positive outcomes for consumers and impose a significant cost on business operations. Failure to pass this cost-benefit test means resources are being wasted to comply with excessive regulation and productivity growth is being crimped.

In light of these developments, it might be prudent to wait to see how effective the new laws are before imposing an even greater burden on the financial services industry. Failure to do so may be detrimental to the consumers and owners of financial services businesses.