Finance Law: Roles and Responsibilities of Responsible Managers and Entities in Financial Services

This article discusses the roles and responsibilities of responsible managers and entities in financial services, including the requirements for registration of a managed investment scheme and compliance with anti-money laundering laws. It covers topics such as the establishment requirements of a scheme, the responsibilities of a responsible entity, and the disclosure requirements for illiquid funds.

FINANCE LAW

Finance law
Answer to 1
a. The role of a responsible manager is that of competence. In simple words, they are
specifically responsible for overseeing the offering of credit or financial services and
managing them as well. As responsible managers, they are directly associated with
decision making that pertains to every day and decision making regarding the
financial services provision. In terms of group, they have the desired knowledge, as
well as skills for the financial services as well as product and specifically meet one of
the five option for providing desired skills and knowledge (FOS, 2017).
Furthermore, ASIC also expects that such responsible managers are able to play an
active part in fostering a culture of compliance in the whole industry. This means that
responsible managers are also liable to operate as major players in the compliance
arrangements of businesses. Nevertheless, apart from such responsibilities, they also
have to undergo ongoing training requirements in order to become competent to offer
financial services (Deegan, 2011). There are five options for illustrating their
adequate skills and knowledge out of which one requirement must be met:
1. Individual assessment
2. APRA standard or relevant industry
3. Short industry course or university degree
4. Product-specific or industry diploma
5. Other knowledge and skills ( reflecting knowledge, as well as skills)
b. Paul and Ivy being the responsible managers of Big Money Ltd are responsible in
performing various supervision and monitoring processes upon their authorized
representatives, directors, and employees to make sure that such representatives are
properly complying with the financial services laws including license conditions. In
relation to this, they can consider processes like keeping track of the representatives,
what kind of role they are entrusted to perform, and whether they are properly
authorized or not (Wood & Sangster, 2005). Furthermore, they can also make sure
that their employee (Fred) does not act outside the scope of what he has been
authorized to do so (FOS, 2017). Furthermore, various training standards are also set
out by ASIC in this regard wherein representatives who offer financial advice to retail
clients are under an obligation to obtain such standards (Conifer, 2016).
The standard step by step process that is traced within the standard AS4811:2006 as a
model for the screening of the employment is as follows:
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 Assessment of risk – the role, as well as potential risk that is present in the role
 Resting on the feature and the role, the adoption for the recruitment policy
must be done and the desired criteria must be set (FOS, 2017).
 An advertisement must be done for the position and the short listing must be
done.
 An efficient check should be conducted by the organization that pertains to
identify checks, bankruptcy check, etc.
 The suitability must be determined in a proper manner.
c. Financial Services Guide must be offered to the clients as soon as possible by the
offering entities after it becomes clear that the financial service will be, or is more
likely to be offered to the client. In other words, an FSG must be distributed to the
client before provision of financial service to them, however, in some instances, it
may be offered after provision of financial service (FOS, 2017). In the given scenario,
the content requirements of the financial services guide are as follows:
1. The title naming ‘Financial Services Guide’ near or at the front of the document.
2. The date of the FSG.
3. Contact details and name of the offering entity and if the entity has an AFL
license, then the license number must also be disclosed.
4. Relevant information about the types of financial services that the AFL entity (Big
Money) is authorized to offer.
5. A statement of the objective of the guide and significant information about other
disclosure documents that the client can obtain.
6. Proper information about the commission, remuneration, and other benefits that
the offering entity will obtain, or reasonably expects to obtain.
7. Efficient details of any relationships that may influence the offering entity in
offering the financial advice. In the given case, a referral arrangement has been
established by Ivy with a nearby accounting practice Nimble Numbers Pty Ltd.
Such information must form part of the FSG (Lai et. al, 2013).
8. Relevant details of the type of compensation agreement that the offering entity
(Big Money) or authorized AFS Licensee has whether through advice associated
with indemnity insurance or otherwise. It must also be disclosed whether advice
related to insurance coverage, retirement planning, etc offered to Keith (friend of
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Fred) comply with Compensation and Insurance Arrangements for AFS Licensees
or not.
9. Details regarding where the offering entity is a player in a licensed market or a
settlement and clearing facility. Furthermore, a statement to this effect must also
be incorporated in the financial services guide.
Hence, these points must form part of the financial services guide of Big Money Ltd
and it must be distributed to the clients before provision of financial services to the
clients.
d. It can be seen in the given scenario that Paul and Fred are under an obligation to
provide personal financial product advice to the clients. Such advice is a statement of
opinion or a recommendation that can influence the decision-making capability of a
person about a specific financial product, or a class of products, or interest in a
specific financial product or class of products. Under Australian Law, all financial
product advice is either general or personal advice. Personal product advice is
provided to a person wherein the person offering it considers one or more objectives,
requirements, and financial condition of the client. Apart from such advice, all other
advice is termed as general advice under Corporations Act (Lai et. al, 2013). Paul and
Fred have a position of fiduciary relationship that is a relationship of trust where the
party that has a higher knowledge capacity of training owes a duty to act in the party’s
best interest that does not contain the same knowledge. Further, they should act in the
client best interest when providing advice to the retail client.
 Act in the clients best interest (section 961B)
 To give appropriate advice (section 961G)
 To alert the client if advice dwells on incomplete or information that is
inaccurate in nature (section 961H)
 Giving priority to the interest of the client (section 961J)
If a person (Paul and Fred) carries out the activity of offering such advice, they
directly adhere to the Corporations Act and unless an exemption is applicable, they
must hold an AFS license or perform as a representative of an AFS licensee. They
must also perform several other duties associated with specific disclosure and conduct
obligations. Firstly, they must ensure that a general advice warning is offered to the
client. Secondly, they must ensure that they prepare and provide a financial services
guide to their clients. Thirdly, they must also prepare and provide an SOA to the
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clients for fulfilling their duties. Fourthly, they must perform in the best interests of
the client so that personal advice is not hampered. Fifthly, they are under an
obligation to warn the client if the personal advice rendered by them is not accurate or
incomplete in nature. Lastly, they must also ensure that the clients’ interests are
prioritized while performing their duties. For instance, if the main business of an
entity is to offer financial products and advice, it may deal with a wide range of
products and services that incorporate a high range of staff (IFA, 2017). During
communication through a phone call, the client may request personal financial
product advice from the providing entity and without offering a warning or indication,
the advice must not be given to the client. Similarly, provision of advice by Paul and
Fred in relation to the planning of retirement, life insurance, etc can be given if the
information is either complete or if it is incomplete, then disclosure regarding the
same has been offered to the client (Keith). Besides, Paul and Fred must offer general
advice warning to the clients as well so that there is no dispute of interest within them.
Secondly, since Paul and Fred have contractual obligations with their clients, breaking
them does not mean a breach of other general obligations as well, but it can amount to
a failure to offer financial services to the client honestly, effectively, and fairly. These
practical examples demonstrate that since there has been no breach of contract
between Paul and his clients, the duties from his side are fulfilled effectively. This is
the fiduciary relationship between an insurance agent and his client just like a trust
relationship between Paul and Fred.
Section 961(B) provides a safe labor for the compliance with the best interest duty in
S961B(1). If Paul and Fred can show that the necessary steps stated in S961B(2) were
taken then they will be deemed to have complied with the duty of the best interest. It
is needed by the safe harbour to:
Trace the aims, financial perspective and the requirement of the client that were
provided by the client by way of instructions. Secondly, it needs to identify the matter
of the advice that is needed by the client. Thirdly, the requirements, objectives of the
client is required to be ascertained. If it is complete that the information that relates to
the situation of the client is not proper then proper queries is needed to be obtained.
The practical example can be cited that of the insurance agent and the client.
There consists a fiduciary link in operation where the insurance agent has the role on
providing advice, putting best interest in client while dealing with the client’s
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financial transaction. In this scenario, the clients have complete confidence in the
agent that links to the performance of a transaction that is correct and lawful.
e. In the given scenario, Big Money Ltd has some responsibilities that must be fulfilled
in order to comply with the Anti-Money Laundering and Counter-Terrorism
Financing Act 2006. Firstly, Big Money Ltd as a responsible entity has the obligation
to conduct ‘know your staff’ risk-associated due diligence interrogations and inquiries
so that probabilities of money laundering are eliminated at the first stage itself
(Jonsson et. al, 2009). Furthermore, it is also advisable that Big Money meets
additional but complimentary statutory obligations to implement policies and
procedures to decrease the risk of money laundering. Besides, the role of internal
control mechanisms also plays a key role in reducing chances of money laundering
within the company (Goodwin et. al, 2008). It is also advisable that Big Money Ltd
offers overall responsibility of such anti-money laundering system to a senior director
or manager who can perform every task in order to mitigate risks effectively (Wahlen
et.a l, 2010). Furthermore, the appointment of a money laundering reporting officer
must also be done so that the entity’s compliance with its anti-money laundering
obligations are directly supervised and controlled.
f.
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Answer to 2
a. Based on the given scenario, it can be seen that the managed investment scheme
intended to be operated by Balderdash must be registered. The registration process
entails that the company must be a public company with at least three directors and
has more than twenty members. Furthermore, both wholesale and retail clients must
form part of the scheme (Petersen & Plenborg, 2012). The scheme must also comply
with the Corporations Act that imposes specific requirements related to funding
management. Furthermore, the scheme was promoted by an individual or associate of
individual who was in the business of promoting such scheme (Damodaran, 2012).
Moreover, in relation to the establishment requirements of the scheme, all the
essential documents must be lodged with the ASIC by the company in order to get
registered.
b. In relation to the scheme, the roles and responsibilities of Balderdash would be to act
as a responsible entity and exercise a reasonable level of diligence and care while
performing its duties for the fulfillment of the scheme. Furthermore, the company
since holds an Australian Financial Services Licence, it must take into account that
the interest of the members of the investment scheme is duly safeguarded. Besides,
the company must also exercise necessary steps to make sure that all the members of
the scheme are treated equally and there is no discrimination among them (Penman,
2013). Furthermore, the company must also make sure that all the funds related to the
scheme are utilized for specified purposes and are not used for fraudulent means
(Fields, 2011). Therefore, Balderdash must act honestly in such a manner that its
members, clients, and funds are properly safeguarded.
c. Under the Corporations Act 2001, responsible entities like Balderdash is not
responsible to establish a compliance committee for the managed investment scheme
for which it operates. The reason behind this can be attributed to the fact that when
less than half of the directors of such responsible entity are external directors, then
only such entity is liable to form a compliance committee. Nevertheless, in this given
case, it can be seen that majority of the directors are non-executive or external
directors that do not align with the aforesaid criteria, thereby proving that the entity is
not required to form a compliance committee for its managed investment scheme.
d. When a fund is illiquid in a managed investment scheme, it is advisable for the Board
to ensure that the investors are made aware of the capability of the fund to realize
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assets in an appropriate and timely manner (Choi & Meek, 2011). Furthermore, the
Board must also disclose to the investor's relevant details regarding the risks of such
illiquid classes of assets. Moreover, under stressed market environment, such
disclosure regarding illiquidity of fund becomes more significant because investors
rely on such information to make proper investment decisions (Davies & Crawford,
2012).
e. The most important purpose of the constitution of a managed investment scheme is
that it can ensure that the scheme registered with the ASIC easily meets certain
requirements of the Corporations Act. Furthermore, a constitution of such scheme
purposes to serve as a legally enforceable document betwixt the responsible entity and
its members by setting out few or all the rights, liabilities, and duties of the
responsible entity in relation to the scheme (Damodaran, 2010). The major
requirements forming part of the constitution are:
1. Powers of the responsible entity in relation to investments or dealing with the
property of the scheme, raising or borrowing of money for the same purpose.
2. Rights of members to terminate or withdraw from the scheme.
3. Methods for dealing with issues associated with the scheme.
4. Winding up the scheme.
5. Consideration in order to acquire an interest in the scheme.
6. Rights of the responsible entity to be indemnified or paid fees out of the property
of the scheme.
All these requirements forming part of the constitution of the scheme are taken into
account by the Australian Securities and Investments Commission (ASIC).
Nevertheless, it is clear that if the requirements of the constitution are not properly
aligned with the Corporations Act, then the constitution will not be approved by the
ASIC (Kell et. al, 2016). Moreover, there are various guidelines as to the assessment
of such constitution by the ASIC that includes asking for more information,
amendment, refusal to register the scheme, etc.
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