Introduction
In Australia, understanding what constitutes a financial product is fundamental for entities holding an Australian Financial Services Licence (AFSL). The regulatory regime in Australia specifically defines and regulates financial products, making their accurate identification essential for licensing and compliance. This licensing framework is established under the Corporations Act 2001 (Cth), highlighting the critical need for licensees to accurately classify the financial products they manage and issue.
For AFSL holders, a clear grasp of financial products is not just a matter of regulatory compliance, but a core requirement for selecting the correct authorisations under their licence. This guide provides essential information for Australian Financial Services Licensees, broadly explaining what financial products are and why this knowledge is crucial for meeting their licensing obligations. It is important for licensees to know the examples of financial products and understand the relevance of these products to their ongoing obligations under the Australian financial services regime.
Defining a Financial Product in the Australian Context
Statutory Definition of “Financial Product”
The Corporations Act 2001 establishes a clear statutory definition of a financial product to outline the scope of financial regulation in Australia. Under the Act, a financial product is described as:
“…a facility through which, or through the acquisition of which, a person does one or more of the following:
(a) makes a financial investment;
(b) manages financial risk;
(c) makes non-cash payments.”
This principle-based definition focuses on the function and purpose of a facility, rather than its specific form, to ensure coverage of a wide array of financial activities. The Act also emphasises that facilities are classified as financial products based on their typical usage for investment, risk management, or non-cash payments, regardless of a user’s individual purpose for acquisition.
Broad Categories of Financial Products
The Australian definition of financial products spans a wide array of tools used to make financial investments, manage risks, or facilitate payments. To facilitate regulation, these products are broadly categorised under the Corporations Act 2001, including:
- Deposit and payment products: Traditional banking products, such as:
- Basic deposit products
- Non-basic deposit products
- Non-cash payment products
- Derivatives: Contracts whose value is derived from underlying assets, events, or rates.
- Securities: Instruments representing ownership or debt, such as shares and bonds.
- Managed investment schemes: Pooled investment vehicles overseen by fund managers.
- General insurance: Covers various risks, excluding life insurance.
- Life products: Investment-linked and risk-based products provided by life insurance entities.
- Retirement savings accounts: Accounts specifically designed for retirement savings.
- Government debentures, stocks, or bonds: Debt instruments issued by government entities.
- Foreign exchange contracts: Agreements to exchange currencies at specific future rates.
- Margin lending facilities: Credit facilities used for investing in financial products.
- Miscellaneous financial facilities: Residual category for financial products that do not fit into other categories.
Importance of Accurate Classification
For Australian Financial Services (AFS) licensees, classifying financial products accurately is critical for ensuring compliance and aligning activities with regulatory obligations. This classification directly impacts the scope of permitted activities under an AFS licence, as licences are tailored to the specific products and services a business provides.
Accurate classification ensures that AFS licensees:
- Comply with regulatory requirements: The product-specific regulatory framework under the Corporations Act 2001 mandates that obligations align with the financial products being offered.
- Maintain the correct authorisations: Licence authorisations are granted based on the specified financial products. Misclassification can result in operating outside the scope of the licence, which may lead to breaches.
- Avoid legal repercussions: Offering services for incorrectly classified or unauthorised products could lead to regulatory offences or other penalties under the Corporations Act 2001.
Understanding and properly classifying financial products is essential for AFS licensees to manage compliance effectively and operate within Australia’s financial services regulatory framework. This ensures a seamless alignment of business activities with legal obligations while mitigating risks of non-compliance.
Financial Services Requiring an AFS Licence
Providing Financial Product Advice
An Australian Financial Services (AFS) licence is mandatory for entities offering financial services related to financial products. This includes providing financial product advice, which refers to offering recommendations or opinions designed to help clients make decisions about financial products.
There are three distinct types of financial product advice:
- Personal advice: This type of advice considers or implies consideration of a client’s individual objectives, financial situation, and needs. It is highly tailored to the client’s specific circumstances.
- General advice: Unlike personal advice, this form of financial product advice does not take into account a client’s individual circumstances. It is broader and more general in nature.
- Class of product advice: This pertains to advice limited to a specific class of financial products without recommending particular products within that class. The focus here lies on the characteristics, features, and risks of a product category rather than individual products.
Dealing in a Financial Product
Dealing in a financial product is another significant financial service that necessitates holding an AFS licence. This activity covers a wide range of actions relating to financial products, whether performed as a principal or as an agent.
Key activities that fall under the scope of dealing include:
- Applying for, acquiring, issuing, varying, or disposing of a financial product: These actions encompass the major lifecycle stages of financial products, from initial application to eventual disposal.
- Underwriting securities or managed investment interests: This involves the act of underwriting financial products, particularly securities and managed investment interests.
- Arranging for the above activities: This includes facilitating or arranging for another person to engage in the transactions listed above. In such cases, facilitating these activities qualifies as ‘dealing’ in financial products, even if the party arranging them is not directly conducting the transactions.
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The Relevance of Financial Products to AFS Licensing Requirements
Selecting Appropriate Authorisations
Selecting the right financial products is a crucial component of the AFS licensing process. This step impacts the scope of financial services you are authorised to provide, as defined by the financial products you nominate in your AFS licence application, particularly in Part A of Form FS01. Careful selection is essential because it determines the extent of your permitted activities under the licence.
When nominating financial products in your application, the outcomes of your choices include:
- Permitted Financial Services: The nature of financial services you can offer, such as providing financial product advice or dealing in financial products, is directly connected to the financial products listed in your application.
- Licensee Obligations: The regulatory requirements you must follow as an AFS licensee are shaped by the financial products you are authorised to manage.
- Use of Restricted Terms: Eligibility to use restricted titles like “stockbroker” or “insurance broker” depends on the financial products you are authorised to handle.
Demonstrating Competence and Resources
Obtaining an AFS licence requires your organisation to exhibit both competence and adequate resources, particularly in relation to the financial products you intend to manage. ASIC thoroughly evaluates your organisation’s capacity to deliver the proposed financial services while ensuring compliance, investor protection, and market integrity.
Key aspects of demonstrating competence and resources include:
- Organisational Competence:
- Responsible managers must be nominated to show expertise in handling the selected financial products and services.
- Part B of Form FS01 requires detailed information about these managers, supported by core proof documents evidencing their skills, experience, and qualifications.
- Adequacy of Resources:
- Your organisation must prove it has sufficient financial, human, and technological resources to provide the financial services effectively and within compliance standards.
- This is documented in Part E of Form FS01, which includes the submission of financial statements and other core proof documents that substantiate resource availability.
Providing clear, detailed, and accurate information in these sections of the application is essential. Such submissions not only satisfy ASIC’s assessment criteria but also assure regulators that your firm is fully prepared and capable of managing the financial products and services it seeks to offer under the AFS licensing framework.
Conclusion
For Australian Financial Services Licensees, understanding and accurately classifying financial products is essential—not just as a preliminary step, but as an ongoing requirement to ensure compliance with the Corporations Act 2001 and maintain the integrity of their license. A proactive approach is critical to avoiding legal risks and sustaining regulatory alignment.
AFSL House is here to guide you through the complexities of financial products and licensing requirements. Contact our expert team today to schedule your consultation and discover tailored solutions to ensure compliance and drive success in Australia’s evolving financial services industry.
