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Tuesday 27 June 2017

17-206MR ASIC clarifies its position on the use of 'independently owned' under s923A

ASIC has clarified its position on the use of restricted terms relating to the independence of financial advisers after seeking external legal advice on whether phrases such as 'independently owned' are restricted terms under s923A of the Corporations Act (the Act).

Section 923A provides that financial service providers can only use certain restricted words and expressions if they do not receive commissions, volume-based payments, or other gifts or benefits, and operate without any conflicts of interest. While words such as 'independent', 'impartial', and 'unbiased' are specified as restricted words in s923A, there was some uncertainty about whether words such as 'independently owned' were also restricted.

Following external legal advice, our position is that words such as 'independently owned', 'non-aligned' and 'non-institutionally owned', and other similar words or expressions, can be used only if a financial adviser satisfies the conditions set out in s923A. This means that if a financial adviser does not receive any commissions or volume-based payments, or other gifts or benefits and has no conflicts of interest or influence from any product issuer, then they can describe themselves as being 'independently owned'. However, if the financial adviser does receive commissions or operates with conflicts of interest, then they will not be permitted to use the term 'independently owned' or other like words or expressions.

Deputy Chairman, Peter Kell said, 'The independence of financial advisers is an important issue for consumers and investors, and may sway their decisions about their investments or their choice of adviser. Consumers must not be misled into believing that an adviser is independent and free from influence when that is not the case. This is why the Corporations Act puts strong conditions around the use of  'independent' and similar word and phrases'.

ASIC acknowledges that there has been uncertainty in the financial advice industry about whether terms such as 'independently owned' and 'non-aligned' are restricted terms under s923A. In light of that uncertainty, we will provide a facilitative compliance period of six months so that advice firms that do not satisfy the conditions in s923A can change websites and documents to remove terms such as 'independently owned', 'non-aligned' or 'non-institutionally owned'.

The facilitative compliance period will not extend to contraventions of s923A where the specified restricted terms 'independent', 'impartial', and 'unbiased' are used. ASIC considers that there has been no uncertainty about how s923A applies to these terms and ASIC will continue to take action against financial service providers for using these terms in breach of s923A.

We have notified key interested stakeholders about our position on s923A by letter. We will also update Regulatory Guide 175 Licensing: Financial product advisers – conduct and disclosure (RG 175) to give further guidance on how to comply with s923A.

The attachment to this media release also includes a brief 'Q and A' for industry participants about our clarification of the provision.

Background

Section 923A prohibits a person from using certain restricted words and expressions in relation to a financial services business or in the provision of a financial service unless:

  • the person (including anyone providing a financial service on their behalf or anyone on whose behalf they are providing a financial service) does not receive:
  • commissions (apart from commissions that are rebated in full);
  • forms of remuneration calculated on the basis of the volume of business placed by the person with an issuer of a financial product; or
  • other gifts or benefits from product issuers which may reasonably be expected to influence that person;
  • the person operates free from direct or indirect restrictions relating to the financial products in respect of which they provide financial services; and
  • the person is free from conflicts of interest that might arise from any relationships with product issuers and which might reasonably be expected to influence the person.

Section 923A(5)(a) specifies that the words 'independent', 'impartial', and 'unbiased', or any other words "of like import" are restricted words for the purposes of s923A. Use of those words as part of another word or expression is also restricted: s923A(5)(b).

Attachment to 17-206MR: ASIC's position on s923A of the Corporations Act

1. Can a financial service provider use terms such as 'independently owned', 'non-aligned' and 'non-institutionally owned' if it does not satisfy the conditions in s923A of the Act?

A financial service provider cannot use terms such as 'independently owned', 'non-aligned', and 'non-institutionally owned' if it does not satisfy the conditions in s923A (e.g. the financial service provider receives commissions from the issuer of a financial product).

We recognise that these terms are often used to convey the ownership and structure of the financial service provider, which is not intended to assert any independence or absence of conflict or influence from a product issuer. However, the use of these terms could also imply that the financial service provider has an independent decision-making structure, free from conflicts of interest and influence from a product issuer. It is still open for these terms to mislead or confuse a consumer as to the nature of the financial service provider's connection to the financial product issuer. In this way, these terms convey a meaning that is of 'like import' to the restricted terms in s923A(5)(a)(i), and so are restricted under s923A.

If a financial service provider that does not satisfy the conditions in s923A wants to indicate its association with a particular industry group that uses a restricted term, the financial service provider must use very clear statements to qualify this association. The qualification should convey information both as to the ownership structure of the financial service provider and also about the financial service provider's relationship with product issuers which may give rise to a conflict of interest (e.g. the financial service provider must specify that they receive commissions) so a consumer would be in no doubt as to the relationship between the financial service provider and financial product issuers. 

2. Can a financial service provider who receives asset-based fees call themselves 'independent'?

Financial service providers who receive asset-based fees are not prevented from using restricted terms such as 'independent' merely because of their receipt of asset-based fees.

One of the conditions that must be met if a financial service provider wishes to use a restricted term under s923A is that the financial service provider does not receive forms of remuneration calculated on the basis of the volume of business placed by the person with an issuer of a financial product: s923A(2)(a)(ii). There has been some uncertainty about whether asset-based fees fall into this category of remuneration and would prevent a financial adviser from using a restricted term.

Our position is that asset-based fees are not considered forms of remuneration calculated on the basis of the volume of business placed by the person with the issuer of a financial product. Asset-based fees are defined in s964F of the Act as a fee for providing financial product advice to a person as a retail client to the extent that it is dependent upon the amount of funds used or to be used to acquire financial products by or on behalf of that person. In contrast, s923A(2)(a)(ii) applies where a person does not receive any form of remuneration calculated on the basis of the volume of business placed by the person with an issuer of a financial product.

Section 923A(2)(a)(ii) and s964F deal with two different matters. Section 923A(2)(ii) is concerned with fee arrangements between a financial service provider and an issuer of a financial product, while s964F concerns direct fee arrangements between the financial service provider and the client. Accordingly, an asset-based fee is not captured by s923A.

3. Does the use of an Approved Product List (APL) constitute a direct or indirect restriction under s923A(2)(d) of the Act and therefore prevent a financial service provider calling themselves 'independent'?

APLs are commonly used by licensees to provide a list of financial products for their representatives to consider when providing advice to their clients. We recognise that APLs are used as a risk management tool to assist a licensee in meeting the legal obligations when they or their representatives are providing financial product advice. However, under s923A(2)(d) of the Act, imposing an APL on a financial service provider could constitute a direct or indirect restriction, thereby prohibiting  a restricted term under s923A from being used. The very nature of an APL, which restricts a representative from recommending products not on the APL, is restrictive.

Whether the use of an APL constitutes a direct or indirect restriction for the purposes of s923A(2)(d) will depend on the operation and breadth of the APL. Where the APL is used as an open list of products or where there is an easy process to recommend a product that is not on the APL the restriction is less likely to prevent a financial service provider from calling themselves independent (assuming all the other conditions in s923A are met). Where the off-APL process is not easy to access, it is more likely to be considered a restriction, and as such, the financial service provider would not be permitted to use a restricted term.

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Last updated: 27/06/2017 12:00