Financial Regulatory System definitions from the Corporations Act PDF

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Financial Regulatory System definitions from the Corporations Act...

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Financial Regulatory System definitions from the Corporations Act Financial Market (as defined in s767A of Corporations Act.) Financial market is a facility* through which a) Offers to acquire or dispose of financial products are regularly made or accepted; or b) Offers or initiatives are regularly made to acquire  or dispose of financial products that are intended to result or may reasonably be expected to result, directly or indirectly;  in (i) the making of offers to acquire or dispose of financial products, or (ii) the acceptance of such offers. (*According to s762C “facility” includes intangible property and/or an arrangement.) Financial institutions Australian financial institutions held assets of around $4.8 trillion in December 2018. The largest group of financial institutions are authorized deposit-taking institutions (ADIs), comprising banks, as well as credit unions and building societies (CUBS), which together account for nearly  55% of financial system assets. The share of financial system assets held by ADIs has been growing over the past three decades. Life insurance companies, general insurance companies, and superannuation funds account for around 30% of financial system assets, a share that has been broadly unchanged for around a decade. Other financial institutions, such as registered financial corporations, securitization vehicles and managed funds account for 13%, a relatively small and declining share of the financial system. Financial Products: Debt or Equity If debt, the interest of the holder is contractual in nature. example: a bond or a note If equity, it gives its holder a proprietary interest in the issuer. Its return is in the form of a dividend that is usually linked to performance of the issuer. example: share in a company Derivatives Derivatives were not regarded as investment products; rather they were regarded as risk management tools.

 urely contractual arrangements u  nder which one party agrees to so something, typically to make a payment or They are p to transfer an asset upon the occurrence of a particular event or at a specified time in the future. As products become sophisticated, the distinction is not easily drawn in practice and the basic legal division became unsatisfactory. Consistent regulation of functionally similar markets and products became necessary. Financial Services Reform Bill (2001) (FSR Act) cast the legislative net much wider and regulates a diverse range of financial products including securities, derivatives, general and life insurance, superannuation, deposit accounts and payment facilities. Financial Product(s763A of Corporations Act) s763A(1) A financial product is a facility* through which, or through the acquisition of which, a person does one or more of the following: • makes a financial investment; • manages financial risk; • makes non-cash payments.

s763A(2) A particular facility that is of a kind through which people commonly make financial investments, manage financial risks or make non-cash payments is a financial product even if that facility is acquired by a particular person for some other purpose. s763A(3) A facility does not cease to be a financial product merely because: a) the facility has been acquired by a person other than the person to whom it was originally issued ; and b) that person, in acquiring the product, was not making a financial investment or managing a financial risk. (*According to s762C “facility” includes intangible property and/or an arrangement.) ASIC Act definition of Financial Product Financial product defined under ASIC Act (s.12BAA) is not identical to the definitions under Corporations Act. For example, ASIC Act definition of financial product expressly includes credit facilities while Corporations Act definition expressly excludes them. The definitions of “financial services” and “financial product” in the ASIC Act are broader than those in the Corporations Act. Making a financial investment (s763B of Corporations Act) For a person to be regarded as making a financial investment, two points need to be satisfied: (1) that person (the investor) must give money or money’s worth (a “contribution”) to another person in circumstances where that other person uses it to generate a financial return (or other benefit) for the investor or at least one or both of them intend that the contribution be so used (2) the investor must have no day-to-day control over the use of the contribution to generate the return. (Example: payments to acquire shares from the issuer) Managing financial risk (s763C of Corporations Act) A person is regarded as managing financial risk if they do one of two things. (1) Either they manage the financial consequences of particular circumstances (2) OR they avoid or limit the financial consequences of price movements: fluctuations in, or in the value of, receipts or costs. (Example: insurance, currency swaps) Making non-cash payments (s763D of Corporations Act) A person makes a non-cash payment if they make payments otherwise than by the physical delivery of Australian or foreign currency in the form of notes and/or coins. (Example: direct debit, cheque) Specifically excluded payment mechanisms include: • Letters of credit issued by a financial institution • Cheques drawn by financial institutions (bank cheques) • Guaranties given by a financial institution see s763D(2)(b) Exemption under s763E If an incidental component of the product is a financial product but it is reasonable to assume that the main purpose of the product is not a financial product purpose (that is making an investment; managing a financial risk; or making a non-cash payment) then the product is not a financial product.

(Example: warranty periods or guarantees in contracts for sale of goods may fall under the definition of “managing a financial risk” but nevertheless considered to be outside of the definition because the primary purpose of the contract is the sale of goods. Financial Service (s766A of Corporations Act) Persons provide a financial service if they: a) provide financial product advice; b) deal in a financial product; c) make a market for a financial product; d) operate a registered scheme; e) provide a custodial or depository service; f) engage in conduct of a kind prescribed by regulations made for the purposes of this paragraph.

Financial Product Advice (s766B) Financial product advice means a recommendation or a statement of opinion, or a report of either of those things, that: a) is intended to influence a person or persons in making a decision in relation to a particular financial product or class of financial products, or an interest in a particular financial product or class of financial products; or b) could reasonably be regarded as being intended to have such an influence. Two types of financial product advice (s766B) Personal Advice is financial product advice that is given or directed to a person (including by electronic means) in circumstances where: a) the provider of the advice has considered one or more of the person’s objectives, financial situation and needs; or b) a reasonable person might expect the provider to have considered one or more of those matters. General advice: All other financial product advice. What is NOT FINANCIAL ADVICE: s766B(5) The following advice is not financial product advice: a) advice given by a lawyer in his or her professional capacity, about matters of law, legal interpretation or the application of the law to any facts; b) except as may be prescribed by the regulations -- any other advice g  iven by a lawyer in the ordinary course of activities as a lawyer, that is reasonably regarded as a necessary part of those activities; c) except as may be prescribed by the regulations -- advice given by a registered tax agent or BAS agent, that is given in the ordinary course of activities as such an agent and that is reasonably regarded as a necessary part of those activities....