The financial services commandments

Section 912A of the Corporations Act and section 47 of the National Consumer Credit Act 2009 articulate the legislative beliefs about the core standards that a financial services provider should meet, writes Sonnie Bailey.

You’re reading Money Management because you work in, or have an interest in, financial services and financial products. Have you ever stopped to wonder, what are the ‘commandments’ of providing financial services?

There are probably as many responses as there are readers of this article.

We can get specific and say that some commandments are vital when providing specific services. For example, if you’re an adviser providing personal advice to clients, it should go without saying that the advice you provide should be appropriate to the client.

This is embedded into the Corporations Act 2001 (the Act) via section 945A.

If you are a trustee and responsible entity of a registered managed investment scheme, you probably don’t doubt that you should (among other things) act honestly, exercise the degree of care and diligence that a reasonable person would exercise if they were in your position, and act in the best interests of the members above your own interests.

These obligations are enshrined in section 601FC of the Act.

What I’m thinking of in terms of commandments, however, are the obligations that apply to all financial service providers.

That is, whether you are an adviser, whether you are operating a managed investment scheme, whether you provide FOREX services, or even whether you provide credit or assistance related to credit.

If you’re an existing Australian Financial Services Licence (AFSL) holder, there are some sections of the Act that will be second nature to you, even if they don’t necessarily roll off your tongue.

Top of the pile will be section 912A, which details the general obligations of an Australian Financial Services licensee. I have this section pinned to the corkboard at my desk, and I encourage licensees to do the same. You can argue that these obligations are the financial services ‘commandments’.

One of the interesting things about section 912A is that it has been mirrored very closely in another piece of recent legislation.

The similarities between section 912A of the Corporations Act and section 47 of the National Consumer Credit Act 2009 aren’t just coincidental. These obligations articulate some legislative beliefs about the core standards that a financial services provider should meet.

If you’re an AFSL holder dreading the fact that you will have to overlay yet another regulatory regime over your operations in the form of an Australian Credit Licence, read through section 47 of the National Consumer Credit Protection Act 2009.

Then take a breath when you realise how familiar these are to you. In many ways you’re already there.

Below is an amalgam of some of the obligations set out in sections 912A and 47 that licensees must adhere to. It would pay to ask yourself, on an ongoing basis, whether your business:

• Is providing its financial services honestly and fairly?
• Has adequate resources to provide its services?
• Is maintaining the competence of its responsible managers, as well as its other representatives, to provide its services? Is everyone adequately trained to provide these services?
• Is well placed to deal with unsatisfied clients? And, given a worst-case scenario, does it have the resources and arrangements in place to compensate consumers found to have been negatively impacted by its operations?
• Has arrangements to identify and manage conflicts of interest? Are these arrangements adequate?
• Has systems for managing risk? Are they adequate?
• Complies with the conditions of its AFSL and the financial services legislation that impacts it? Does it take reasonable steps to ensure that its representatives do the same?

Many people would respond affirmatively to these questions and say that they are just good business sense. An Australian financial services licensee is legally required to do these things, which means that you could say you’re legally obliged to run a tight ship.

An interesting obligation that I have left out of the list above is that you need to run your business efficiently. It means that your compliance function shouldn’t operate as a ‘business prevention unit’. More broadly, it means that you’re obliged to operate your business so that you get the most out of what you put in.

Efficiency is a key theme in both the Corporations Act and the ASIC Act. You may be interested to know that ASIC does not escape this obligation either. Paragraphs 1(2)(a) and (d) of the ASIC Act requires that ASIC must strive to:

• “maintain, facilitate and improve the performance of the financial system and the entities within that system in the interests of commercial certainty, reducing business costs and the efficiency and development of the economy”; and
• “administer the laws that confer functions and powers on it effectively and with a minimum of procedural requirements”.

Another interesting insight is that principles of efficiency, honesty and fairness are key considerations in a great deal of the Financial Ombudsman Service’s determinations and adjudications.

The ‘commandments’ set out in the bullet points above have been formalised in regulations and Australian or international standards, and have been expanded on in ASIC Regulatory Guides and elsewhere.

Arguably, if you are looking after other people’s money — and all that it represents — this isn’t such a bad thing. Additionally, specific guidance in relation to these business principles can work in your favour. Many industries don’t get this explicit guidance.

Maybe the legislation doesn’t address everything. Perhaps there are areas that it is blind to, and maybe even legislative requirements that offend what you believe are the ‘commandments’ of providing financial services.

I encourage you to reflect on these key commandments and how your business matches up to these standards. And of course, consider what other commandments you expect your business, and perhaps those of others in the industry, to adhere to?

Sonnie Bailey is a lawyer with law firm Holley Nethercote.