Understanding ‘Dealing in a Financial Product’ for Australian Financial Services Licence Compliance

Introduction

For businesses operating within the Australian financial services industry, understanding the concept of ‘dealing in a financial product’ is crucial for Australian Financial Services Licence (AFSL) compliance. The Corporations Act 2001 (Cth) defines ‘dealing’, and it is a fundamental aspect for any entity that needs to hold an AFSL to provide financial services legally in Australia.

This article serves as a guide to navigate the definition of ‘dealing’ as per section 766C(1) of the Corporations Act 2001 (Cth). We will clarify the key types of conduct that constitute ‘dealing’ including the concept of ‘arranging’ for dealing. Furthermore, we will discuss exemptions from this definition, providing essential information for AFSL holders and those seeking to understand their obligations under Australian financial services laws.

Why is it Important to Understand ‘Dealing in a Financial Product’

A clear understanding of ‘dealing in a financial product’ is essential for compliance with the AFSL requirements. Engaging in activities classified as ‘dealing’ typically necessitates holding an AFSL, which is a legal requirement for providing financial services in Australia. Failing to recognise what constitutes ‘dealing’ can lead to significant regulatory breaches and penalties.

AFSL holders must accurately identify their activities to ensure compliance with financial services laws. Misclassifying actions as non-dealing when they actually fall under the definition can result in serious consequences, including:

• Fines
• Potential imprisonment

Therefore, it is crucial for businesses and individuals involved in financial services to be well-versed in the definitions and implications of ‘dealing’ as outlined in the Corporations Act 2001 (Cth). Understanding these concepts not only helps in maintaining compliance but also protects the integrity of the financial services industry.

Defining ‘Dealing’ Under Section 766C(1) of the Corporations Act 2001 (Cth)

Applying for or Acquiring a Financial Product

Under section 766C(1)(a) of the Corporations Act 2001 (Cth), applying for or acquiring a financial product is explicitly defined as ‘dealing’. This includes any action taken by an individual or entity to obtain a financial product, whether through:

• Direct purchase
• Application

For example, if a person fills out an application form to invest in a managed fund, this action constitutes dealing in a financial product.

Issuing a Financial Product

Section 766C(1)(b) of the Corporations Act 2001 (Cth) classifies issuing a financial product as ‘dealing’. This encompasses the creation and distribution of financial products to consumers. Key aspects include:

• Creation of financial products: Developing new financial instruments.
• Distribution to consumers: Offering these products to the public.

For instance, when a company creates shares and offers them to the public, it is engaging in dealing by issuing those financial products. Compliance with specific regulatory guidelines is required to ensure that the issuance is conducted fairly and transparently.

Underwriting Securities or Managed Investment Schemes

Under section 766C(1)(c) of the Corporations Act 2001 (Cth), underwriting securities or interests in managed investment schemes falls under the definition of ‘dealing’. This activity involves:

• Assuming risk: Purchasing securities or interests to ensure full subscription of the offering.
• Ensuring availability: Guaranteeing that the financial product is successfully offered to the market.

For example, if an investment bank agrees to underwrite a new share issue, it is considered to be dealing in those securities.

Varying a Financial Product

Making changes or variations to an existing financial product is also regarded as ‘dealing’ according to section 766C(1)(d) of the Corporations Act 2001 (Cth). This could involve:

• Altering terms: Changing the interest rate on a loan.
• Modifying policies: Adjusting the terms of an insurance policy.

Such variations must be communicated clearly to the affected parties to maintain compliance with regulatory standards.

Disposing of a Financial Product

Disposing of or selling a financial product is included in the definition of ‘dealing’ under section 766C(1)(e) of the Corporations Act 2001 (Cth). This encompasses any transaction where a financial product is:

• Sold: Transferring ownership to another party.
• Transferred: Moving the financial product from one entity to another.

For example, if an individual sells their shares in a company to another investor, this transaction is classified as dealing in a financial product. It is essential for parties involved in such transactions to adhere to all relevant legal and regulatory requirements.

Arranging for Dealing

Section 766C(2) of the Corporations Act 2001 (Cth) defines arranging for a person to engage in conduct that constitutes dealing as a form of ‘dealing’. This includes facilitating the actions outlined in section 766C(1), such as:

• Assisting with Applications: Helping individuals apply for financial products.
• Organising Issuance: Coordinating the distribution of securities.

For example, if a financial adviser helps a client complete an application for a managed investment scheme, this activity is considered dealing. Arranging for dealing typically involves significant intermediary involvement and value addition. 

‘Arranging’ for Dealing as an Extension of ‘Dealing’

What Constitutes ‘Arranging’ for Dealing?

Arranging for a person to engage in conduct that constitutes dealing in a financial product is itself considered a form of dealing. This includes actions such as:

• Negotiating the acquisition of a financial product
• Facilitating the variation or disposal of a financial product
• Assisting with the application for a financial product

According to ASIC Regulatory Guide 36, arranging involves playing a significant role in the transaction to the extent that the transaction might not occur without the intermediary’s involvement.

Key indicators that someone is arranging include:

• Importance of Involvement: If the intermediary’s participation is crucial for the transaction to proceed, it indicates arranging.
• Value Addition: If the intermediary adds value to the transaction for one or more parties, this further supports the notion of arranging.
• Receipt of Benefits: If the intermediary receives benefits based on the transaction’s outcome, this suggests an active role in arranging.

For example, referring back to the aforementioned hypothetical scenario where a financial adviser helps a client apply for a managed investment scheme: If the adviser not only fills out forms but also explains the implications and negotiates terms, they are likely arranging for the client to deal in that financial product.

Critically, not all facilitative activities qualify as dealing. The determination depends on the context and the degree of facilitation provided and will involve additional regulatory considerations to ensure compliance.

Exemptions from the Definition of ‘Dealing’

Dealing on Your Own Behalf (Principal Exception)

The exemption for dealing in financial products on one’s own behalf is crucial for individuals engaging in personal investment activities. According to section 766C(3) of the Corporations Act 2001 (Cth), a person is not considered to be dealing if they are acting on their own behalf, unless they are a product issuer dealing in their own products. This distinction is important because it allows individuals to transact without needing an AFSL, provided they are not issuing the products themselves.

For example, if an individual purchases shares for personal investment, they are dealing on their own behalf and do not require an AFSL. However, if that individual were to issue shares to the public, they would then be required to hold an AFSL.

Government and Public Authorities Dealing in Own Securities

Government bodies and public authorities benefit from specific exemptions when dealing in their own securities. Under section 766C(4) of the Corporations Act 2001 (Cth), these entities are not classified as dealing when they transact in their own securities. However, it is essential to note that a body corporate or an unincorporated body is not exempt if it is classified as an investment company. This ensures that while public authorities can manage their financial products without an AFSL, investment companies must adhere to licensing requirements.

For instance, a local government authority issuing bonds to fund community projects would not need an AFSL for this transaction, as it is dealing in its own securities. Conversely, an investment company engaging in similar activities would require an AFSL.

Sub-Underwriting Activities

Sub-underwriting activities are exempt from the definition of dealing in financial products. According to section 766C(6) of the Corporations Act 2001 (Cth), a person acting as a sub-underwriter in relation to an issue of securities is not considered to be dealing, provided the transaction relates only to the sub-underwriting. This exemption is vital for those involved in underwriting processes, allowing them to participate in capital raising activities without the regulatory burden of holding an AFSL.

Imagine a financial institution that agrees to underwrite a portion of a new share issue but then sub-underwrites that risk to another party. The sub-underwriter does not need an AFSL for this activity, as it falls under the exemption provided in the legislation.

Clerical and Cashier Work Exemption

The clerical and cashier work exemption is outlined in section 766A(3) of the Corporations Act 2001 (Cth). This exemption applies to conduct that is part of routine clerical work or cashier duties, which are generally administrative, processing, or receipting in nature and do not require specialised financial knowledge or skills.

For example, a bank employee processing transactions for clients, such as deposits or withdrawals, is performing clerical work and is exempt from needing an AFSL. However, it is important to note that while individual clerical activities may be exempt, the aggregation of these activities within a corporation or business may constitute a financial services business that requires licensing. This distinction ensures that the overall operations of a business comply with regulatory requirements.

Additional Considerations

It is crucial to understand that the list of exemptions is not exhaustive. The Corporations Act 2001 (Cth), relevant regulations, and ASIC instruments should be consulted to determine whether conduct constitutes dealing. Additionally, regulations may prescribe conduct that is taken to be, or not to be, dealing, and these regulations have effect despite anything else in the relevant section of the Act. Even if a person is engaged in dealing, they may not need an AFSL or authorisation depending on the specific circumstances surrounding their activities.

Conclusion

Understanding ‘dealing in a financial product’ as defined in the Corporations Act 2001 (Cth) is essential for compliance with AFSL requirements. The six key types of conduct that constitute ‘dealing’—applying for or acquiring, issuing, underwriting, varying, disposing of a financial product, and arranging for dealing—are critical for any entity operating in the financial services industry. Recognising these activities helps businesses ensure they are adhering to the legal obligations set forth by ASIC.

For businesses looking to apply for an AFSL or ensure compliance with Australian financial services law and regulations, book a free initial consultation with one of our experienced AFSL lawyers today. AFSL House possesses market-leading expertise in financial services regulations and can guide you through the AFSL application and compliance processes to ensure adherence with all regulatory requirements.

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