Financial Services Licenses and Product Disclosure - Assignment Example

Corporations act 2001 Names: Tutor: Date: PART A: FINANCIAL SERVICES LICENSES AND PRODUCT DISCLOSURE Question 1 What are Jenny’s immediate obligations under the Corporations Act 2001? Jenny’s immediate obligations as a licenced and authorised representative of the AFSLS are; she is obligated to act with integrity while conducting her activities and must provide full disclosure of financial services she is offering to her clients. These financial services and products she offers to her clients include; superannuation trust and policies for public and personal offers, shares and debentures for companies listed publically. Adequate disclosures regarding such products enable interested clients make informed choices and decisions before investing. Jenny is principled to follow suit as this is the obliged way to conduct business. For example, she ought to ensure that clients understand her products (Corporations act 2001, 2). These Immediate obligations are contained under Financial Services Disclosure Pt 7.7 of Corporations Act 2001, Chapter 7.ASCI Regulatory Guide places Jenny under the obligation to disclose, provide requirements and advice about her financial products to her retail clients. This is because the ASCI aim to ascertain that clients are provided with concise and sound information regarding products offered so as to satisfy the consumer’s informational needs. Jenny is obliged to advise her clients appropriately under the ASCI (Corporations act 2001, 2). Jenny’s advice and support obligations found under the licences part 912A (1) suggest that; Jenny being a licensed representative in providing financial services, she ought to put in place adequate systems that will manage and resolve conflicts that arise from differing interest either partly or wholly in relation to the business activities that have taken place. Jenny is obliged to show case her competence by providing professional advice of those buying those financial products. Jenny is obliged to have adequate training while providing her financial services and advice. For example, she is needed to research, make relevant inquiries and give professional knowledge prior, to those clients having interests in investment schemes (Corporations act 2001, 3). What are Jenny’s continuing obligations under the Act? When Jenny is giving advice to clients, under s 961B (1), she ought to conduct her activities bearing the clients best interest. Corporations Act 2001, under s 961B (2), provides a safe zone for financial planners and advisers need to operate. Jenny needs to continuously identify the needs of clients and provide the advice sought. During the satisfaction of informational needs of clients, if advice given was inaccurate, Jenny is obliged to make inquiries and get more sustainable and accurate advice (Corporations act 2001, 4) Jenny is obliged to exercise her professional judgement to determine if products are not AFS licence approved. For example, If Jenny sells a financial product that is not AFS approved, she has to ensure that the product has recommended authorisations from its respective licensee for her to give advice. This is a necessary step for insurance products. Jenny as a financial planner ought to seek advice from stockbrokers regarding the share and debentures to give to specific clients. Under Corporations Act 2001, Jenny should ensure that advice provided by the stock brokers is not a secondary service to her clients. Jenny is continually obliged to formulate her own advice in respect of what was said by the broker. This would prevent information passed to client as being consider a secondary service which is liable under the act (Corporations act 2001, 5) Question 2 What are Jenny’s obligations under the Corporations Act in advising John - and what are her potential liabilities should the personal superannuation policy prove insufficient for John’s needs? Jenny under the Corporations act 2001, chapter 7 is obliged as a must to give the appropriate advice to John. This is because John is requesting her to device a superannuation strategy that was suitable for his purposes. Under the act, this would be termed as a financial product or service advice. Jenny must only provide such personal advice as requested if she would be able to ascertain that the information provided was reasonable and appropriate for the client. Jenny is obliged to accomplish her duties under section 961B bearing Johns best interests (Corporations act 2001, 6) Under ASIC, Jenny’s advice is deemed necessary as the intended outcome is to satisfy Johns pressing situation. Her obligation to John is to place him at a better position if he uses and utilizes the advice. John provided Jenny with copies of his income and tax statements since he was concerned he would not be able to meet his superannuation goals. Using these copies, Jenny is obliged to refer to other individuals with the appropriate skills regarding the tax considerations on the subject. Such individuals may include registered tax agents (Corporations act 2001, 2014). John has provided all his documents to her. Under section 961H (1) Jenny is obliged to warn her client that her advice may be inaccurate if she reasonably suspects the information she was initially provided with was inaccurate. Therefore John should consider the relevance and accuracy of the advice given by relating it to his current financial situation. He should provide accurate information before following Jenny’s advice. Jenny should give such a warning the same moment, using the same means, while advising John. Where advice providers such as tax agents give warnings, Jenny is obliged to solely relay such information because no other party should be involved (Corporations act 2001, 7). Jenny’s potential liabilities under the corporations act may include a civil penalty if John’s superannuation policy fails to satisfy his needs. In such a situation John has the legal right to sue Jenny for compensation for any loss incurred by following inaccurate advice without warning. The client is provided with this right under section 961 when breached. To avoid a civil penalty, Jenny is liable to give SOA with a logic structure and easily understandable. Jenny has a defence under section 949A (4) for any offence done while providing her client with the financial advice. This is because the policy’s inefficiency to cater for the needs would have resulted from the inaccurate copies handed in by John. This would make her potentially liable as the strategy would fail (Corporations act 2001, 9). Question 3 What are Jenny’s obligations in providing the PDS to John, and what are the potential legal liabilities of Jenny and XYZ Ltd in respect of the mistake in the PDS? PDS main intent is to disclose the benefits of a financial product recommended by an adviser (Jenny) so as to minimise the risk of Jenny working in her own self-interest to John’s disadvantage. PDS is prepared to contain information of particular products offered by the XYZ ltd Company. It contains the details on terms, potential risks, fees and charges that the client may incur. This PDS will assist John to make better and informed decisions. A financial disclosure statement in this case will enable john make an informed decision before investing in Jenny’s suggested financial product(Corporations act 2001, 14). In chapter 7 of the Corporation act 2001, Jenny is obliged to disclosure via documentation. In part 7.9 under Financial Product Disclosure suggest that John must be given a PDS before agreeing to the provided financial investment. Under RG 175, financial product advisers, Jenny is obliged to give advice on the product, prepare a FSG, providing John with sustainable professional advice and prepare a SoA. While preparing a PDS she is obliged to follow good disclosure principles. The outcome is to assist John in making comparisons regarding the suggested financial investment (Corporations act 2001, 20) Under the RG 175, Jenny is found to be liable. This is because she did not provide john with a copy of the PDS. She made this assumption because she felt she had been conversant with john’s financial situation. Under the Financial Service Guide principles, the disclosure ought to be timely, complete, provide product understanding and comparison. Jenny is liable because she did not highlight important information to john about the investment product hence a total lack of considering Johns consumer needs under the act. Unknown to Jenny, the PDs contained an error hence would not be enough to secure the financial income expected to bail John out of his financial situation. In case of financial loss, Jenny is liable to compensate John under the civil penalty provisions found in the Corporations act (Corporations act 2001, 22). When Xyz ltd wrote to Jenny that an error had occurred, the company avoided any liability that would befall them. This is because under the corporations act retail clients like John and advisers like Jenny would have the legal right to claim for compensation if such information had not been relayed. Under section 949A (2), Jenny would be liable if she does not warn her client that she had prepared the PDS without taking into account Johns consent. John should have been given a PDS of the particular investment product for him to make an informed decision before investing in the company. Jenny is therefore liable under chapter 7.9, Division 2 of the act which clearly states that she ought to relay advice to John before acquisition of the investment (Corporations act 2001, 24). Question 4 What are the legal obligations and potential legal liabilities of George and Personal Insurance Ltd? What remedies might be available to Julia? George a holder of AFSL is obliged under the corporation’s act 2001 to give Jane a FSG. This is to assist Jane to make the rite decisions to satisfy her needs. George is expected to provide reasonable level of detail before Jane acquires the Superannuation product from the Personal insurance Ltd Company. George is obliged to provide documentation that is clear and concise to satisfy Jane’s purposes. The information ought not to be misleading in any way. George should ensure that the FSG provided to Jane contains a statement that giving the names and contact details of the Personal limited company (Corporations act 2001, 34). Under the corporations act George is obligated to provide Jane with special instructions regarding how she could pass instructions to the company regarding her superannuation. He is also obliged to provide information of various authorised financial services the company offers and how it relates to the Superannuation product. Jane needs to be informed on the Company’s legality, for example when the company provides the superannuation service its act under the Australian Government’s authority. George is Under chapter 7.7 is obliged to inform Jane on the remuneration or commissions that he would receive for providing his professional advice (Corporations act 2001, 2014). Jane is getting personal advice from George in respect to his qualification as a licenced financial planner. George is obliged to provide such personal advice in the best of the client’s interest. This is to say, the information needs to be clear .Ambiguity is not allowed under the appropriate advice rule. George must highlight any conflicts of interest that may arise in relation to affecting the advice provided. Such include commissions. This is a fiduciary requirement that may arise out of their advisor and investor relationship (Corporations act 2001, 36). Under section 946A of the act the, George is required to provide Jane with a SoA to accompany his advice. This would be a record of his advice to Jane. This is similar to a financial plan. George is obligated to prepare a SoA as a representative of the Personal limited company. This is because it will relate to specific financial products offered by the entity which fall under personal advice given to Jane. The amount of information contained should reference what Jane as their client would reasonably want purchase so as to make a decision. Since Jane is making a small investment in the company, the entity is legally obliged to keep a record of George’s advice and to give her a similar copy. Both George and the Company will be liable if they do not provide Jane with a statement of information regarding the superannuation. The remedy to Jane’s situation would be a refund and possible termination of her contract with the entity. This means loss of her Superannuation benefits (Corporations act 2001, 40). Question 5 What are the legal obligations and potential liabilities of George and Managed Investments Ltd? What remedies may be available to Jane? George is legally obliged under Section 961B (1) to act in Jane’s best interests. This is because as a client, Janes wishes to invest 2000 dollars. Since she is seeking scaled advice regarding different investment opportunities George ought to make inquiries that are tailored to suit Jane’s purposes. When George received a circular from managed investments ltd. ASIC in RG175 suggests that George as a personal adviser to Jane need to make clarifications from the company so as to ascertain if his judgment would fit the subject matter. George is also legally obliged to determine the client’s sensitivity in term of costs and rewards. Clarification here needed to be done was on the units offered by the Company. George was therefore at the time able to ascertain that the units satisfied Jane’s purpose (Corporations act 2001, 40). Under section 961(2) of the act, George is legally liable. This is because he ought to determine if the information provided by the company was complete and accurate .Since the information relayed in the circular was inaccurate unknown to Gorge, he thought it was relevantly applicable to satisfy Jane’s needs. Under section 961C George is obliged to exercise his expertise to reasonably inform Jane according to her subject matter by carefully assessing the company’s circular. He should have assessed and made inquiries in the information contained in the circular was viable. George is liable since he failed to exercise such precautions hence advice Janes to act upon wrong advice in contrast to her expectations (Corporations act 2001, 42). George is legally liable because he failed to conduct reasonable investigations regarding the financial products being offered by Managed investment ltd. This is because under the corporations’ act 2001 he ought to identify a product that would meet Jane’s goals as an investor. At the time his advice was relevant as it was directed in achieving Jane’s objectives, but due to lack of diligence his advice failed Jane. According to section 961E, George is obliged to act in the client’s best interest through exercising his expertise in the matter where he is required to advice Jane after objectively assessing the Company’s financial products (Corporations act 2001, 43). Managed Investments Ltd is liable since the circular contained a factual error. Jane has the legal ability to demand for a refund under the civil penalty provisions contained in the act. For example let’s use a scenario where she would have invested knowingly there was an error no; in such a case no refund would have been suggested. The company is legally liable and obligated to provide accurate information to its representatives (George) pertaining its financial products. This is to assist clients (Jane) in making informed and better decisions before following George’s advice. Failure to do so, as it is with this scenario, they are legally liable to face prosecution for misleading their clients. Clients like Jane would not receive any income contrary to her investment needs. To avoid a suit they ought to refund Jane her invested amount or offer her a better financial product tailored to satisfy her investment goals. For example a financial product that Jane will receive a return on investment, an income (Corporations act 2001, 2014). PART B: FINANCIAL PRODUCTS: LEGAL REQUIREMENTS FOR OFFERING CORPORATE SECURITIES Question 1 What are the requirements of the Corporations Act 2001 if it decides to go ahead with David’s proposals? David first proposal is raise to funds for ABC limited expansion through issuing of shares to Eternal life Ltd. Under the corporations act 2001 this is known as equity financing. Under section 124 of the act, companies are empowered to look and raise fund through issuing of shares. As the managing director, David is required to make and advocate for decisions that will suit the company’s capital needs for expansion. Under the act, companies that wish to expand their operations are allowed to explore trading opportunities, for example in David’s case, issuing of shares to the amount of 1million dollars from Eternal life Ltd (Corporations act 2001, 37). Under section 231 of the corporation act, Eternal life ltd as the investor will become part of the company once they purchase the offer. However, David is restricted under section 232 not to issues shares if the underlying intentions are to frustrate a takeover. An important requirement under chapter 6D of the act suggests that ABC ltd should provide full disclosure to the investor( Eternal Life ltd) and all other relevant information before the acquisition and purchase of the shares. Therefore Eternal life ltd is protected under the act which states that David must provide a disclosure document before both entities become partners. ABC is issuing a new security; hence David under the act is obliged to compile a disclosure document that is lodged with ASIC. He is only exempted not to do so under section 708A.For example during small scale offers where the interested participants are fewer than 20 and are subscribing for shares less than 2million dollars through a rolling period of 12 months (Corporations act 2001, 41). Requirements under the corporations act suggest that a prospector which is disclosure document be offered to the investor company for them to ascertain whether they are interested in pursuing ABC’s offer. Under section 712 (1) David is required to provide a prospectus containing material which has already been lodged ASCI. Such materials include financial reports. Financial reports for ABC will be part of the prospectus. Copies are required to me made available to the investing company. Under section 709 (4) which deals with scenarios similar to AB’s where companies attempt to raise small funds, to the tune of 5 million dollars to fund their expansion operations, are required to offer an Information statement. However section 715 of the act requires that Eternal life ltd needs to obtain this document solely for the purpose of seeking their own professional advice before making the investment decision (Corporations act 2001, 42). Question 2 What are the requirements of the Corporations Act 2001 if it decides to go ahead with David’s proposals? Under the corporation’s act 2001, David is allowed to raise funds through a loan or debit capital. His second proposal is termed as debit financing. Interested investors through their bargaining power may negotiate the 5000 dollar investment be in the form of a convertible debenture. With this type of investment the lenders will be able to benefit in future because they have the option to converting the debt into equity which is a less risky type of investor profit. However this will also be beneficial to ABC as they would benefit from deduction of taxes paid to the investors (Corporations act 2001, 41). Under the act, investors are required to be paid back by ABC by the expiration of the agreed time frame. The investors are contractually required to be paid some form return, an interest. Following the advertisement Place by David in the News Paper, investors will enjoy a 6% interest per annum. The dates for these payments under the act are restricted to investor and company negations in order to reach an agreement that will settle on a specific date. Investors lodged in loan with ABC are required to be paid their interest regardless of how great or poor the company will be performing (Corporations act 2001, 43). Section 124 of the act, empowers David to place the advertisement as a way to borrow money through debentures. ABC is required under section 9 to repay this debt .In recent times such documents like the certificates being offered by David to borrow funds from investors are term as debentures under the act. This debt is secured through interest. ABC 6% interest rate will ensure investors repayment. Under section 283BH, ABC could commit an offence if they invite members of the public to loan them money with no security interest. ABC is required to follow this principle to give its investors additional security (Corporations act 2001, 43). Through David’s advertisement in the newspaper to raise funds to the amount of 10 million dollars, such securities fall within chapter 6D of the act. Under section 727, ABC is required to make such advertisements, certificates and issuance of debentures having provided a disclosure document, David is required to ensure that the document is lodged with ASIC as directed in chapter 6D.Harsh penalties may result if these requirements are not adhered to. Under chapter 2L of the act, ABC is required to have in place arrangements to appoint a trustee. The company is obliged to carry out its business activities in an appropriate manner. For example provide ABC’s financial records for inspection to the trustee. The trustee must also be made aware of any over charges that may occur (Corporations act 2001, 40). Question 3 What courses of action might each of these directors adopt to avoid liability? Section 729 of the corporation act 2001 suggests that all those who have incurred a loss by depending on the company’s information provided in the disclosure documentation ought to claim for compensation against the directors. In this case, it includes David, George and the others. For George, David and the other directors to avoid liability, they could avoid being named in the prospectors and revoke any consent to include their names during the preparation of the prospectus. However practical concerns arise, this is because compensation to be effective those liable ought to have the necessary funds. The directors may liquefy their ownership if such a case arose to avoid liability (Corporations act 2001, 34). Under section 728, investors may claim for financial loss. David would be posting misleading information in the advertisements. This is because he aims to attract most of the entities investors by luring them in with high interest rates. This is deceptive. David does so because the company will acquire a new dealership and will be able to meet its financial obligations. However George disagrees. This is because statistics suggest that the coming year’s projected car dealership sales will decline up to 20%.If this happens, investors will incur losses. George to avoid legal liability if this happens suggests the information be included as part of the advertisement. This was to enlighten the general public on the risks involved before investing. However, all the directors disagreed as they felt it would be a loss of business and the 10 million dollar target would not be achieved. In order to avoid liability, the directors may adopt to form a due diligence committee that would be responsible for the information contained in the prospectus or disclosure document. The committee will collate information and provide supporting evidence suggesting the advertisement complied with Chapter 6D of the act (Corporations act 2001, 37) The omission of such information renders the disclosure document as misleading. This is because David’s forecasts were not based on reasonable grounds. This is prohibited under Section 728 (1) of the act. All directors to avoid liability should have consented to including such a crucial statement. They might be ordered to pay compensation to investors or even face imprisonment. For the directors not to be liable they can hide behind section 731 which provides them with a due diligence defense against liability. This will show that ABC’s directors took part in making inquiries which made them to reasonably believe that the prospectus was not misleading in any way. Because of this defense the directors may claim not to be liable as there was no deceptive omission of crucial information to assist investors before making their decisions. (Corporations act 2001, 40) Reference list Corporations act 2001.Revised Chapter 4: Conduct and Disclosure in the Investment Advisory Process.Law of investments. (Pp. 1-45) Online< http://www.thomsonreuters.com.au> [accessed on 9th November, 2014] Read More