Last week the Government has released draft legislation and an explanatory memorandum in relation to the reforms to the training standards for those who provide personal advice to retail clients in a variety of products, including derivatives and/or foreign exchange contracts. As foreshadowed in the Government’s response to the Financial Systems Inquiry in October 2015, the draft legislation includes reforms to raise the education, training and ethical standards for advisers. Stakeholders are invited to comment on the draft legislation prior to 4 January 2016, with Parliament expected to consider the legislation in early 2016.
Training Standards – Changes for FX brokers whose staff provide personal advice
The draft legislation in its current form includes significant changes to the current training standards for those in the OTC derivatives and margin FX industry who provide personal advice to clients. There are four new education and training standards, three of which are preconditions to being authorised to provide personal advice to retail clients. The legislation also provides for the establishment of a standards body which will set education standards and develop a code of ethics for advisers.
The three preconditions which advisers must meet, prior to being authorised, are:
- Complete a bachelors degree, or equivalent qualification, approved by the standards body;
- Undertake a year of either (or both) work and training that meets the requirements set by the standards body; and
- Pass an exam approved by the standards body.
The fourth obligation is ongoing and requires advisers to meet continuing professional development requirements as set by the standards body.
Whilst these new requirements are a significant change to the existing training requirements contained in ASIC’s Regulatory Guide (RG) 146, most brokers and FX providers offer general advice only and will not be impacted by the draft legislation. The changes will impact brokers and FX providers who offer Managed Discretionary Accounts, PAMMs and MAMMs and copy trading services the hardest. You can read more about the regulation of these services in Australia here.
In relation to the ongoing CPD requirements, AFSL holders will need to ascertain what the relevant requirements are once these are put in place by the standards body and ensure their current CPD training meets these standards. Given many AFSL holders allow their financial advisers to undertake a variety of ongoing training, ranging from attending seminars held by industry bodies, to internal training courses, to reading online blog articles, this may require a significant overhaul of their current practices. Additionally, many in the OTC derivatives and margin FX industry undertake IT training to assist in their knowledge and skills regarding the use of the online platform. Whether this type of ongoing training will meet the new standards is yet to be determined.
AFSL holders will also be required to notify ASIC whether their representatives have completed the required CPD hours at the end of the financial year. Accordingly, AFSL holders will need to keep detailed records of all ongoing training completed during the year and ensure the relevant notice is lodged each year within the required timeframe.
Code of Ethics
In July 2019 a Code of Ethics for those provide personal advice to retail clients will come into force. The Code will be developed by the standards body and all advisers will be required to comply with it. Advisers must also be covered by a monitoring and enforcement scheme which is responsible for setting out how compliance with the Code will be monitored and enforced. The introduction of a Code of Ethics is in response to the various complaints and findings of misconduct by advisers.
Compliance with the new standards, CPD requirements and Code of Ethics will be included on the Financial Advisers Register. This has significant implications for advisers as the information regarding their CPD compliance and any breaches of the Code of Ethics will be publicly available.
Training Standards – Changes for FX brokers whose staff do not provide personal advice
In the current and proposed formats, advisers providing general advice only are not required to hold a degree, complete a professional year or pass an exam. The current continuing professional development requirements are not set by a single independent body and are not consistently met throughout the industry. Once the draft legislation is passed, it is our understanding that existing advisers will continue to be subject to the current training standards contained in RG146. This includes holding a Diploma (for Tier 1 products) listed on the ASIC Training Register that meets the relevant training standards. Advisers providing personal advice must complete a course which covers three components:
- Generic knowledge; and
- Specialist knowledge about the specific products they advise on
Advisers who provide general advice only will not be subject to the new requirements regarding ongoing CPD. At present, there are no specific requirements in relation to ongoing CPD, however most in the industry complete an average of 20 hours per year to ensure they remain up to date with the products on which they provide general advice. In the absence of further legislative reform, we understand that these arrangements will continue to apply to advisers who provide general advice only.
What action do I need to take?
Anyone providing personal advice on derivatives and/or foreign exchange contracts will need to review their current qualifications and determine whether they will need to conduct additional training to ensure compliance with the three preconditions. Undertaking additional training may involve significant cost and time, particularly for those in the industry who do not currently hold a degree or diploma. Many in the OTC derivatives and margin FX industry will not currently hold a degree and therefore the draft legislation is likely to have a significant impact on the industry.
Once the standards body has been established and additional information regarding the preconditions has been released, Australian Financial Services Licence (AFSL) holders will need to conduct a thorough review of the qualifications held by all representatives who provide personal advice to retail clients in relevant products under their AFSL.
For those existing representatives who have provided advice to retail clients in relation to derivatives and/or foreign exchange contracts prior to 1 July 2017, the legislation provides transitional arrangements in relation to the three preconditions. Existing representatives will be required to meet the following standards by 1 July 2019:
- Complete the relevant bridging course (as determined by the standards body);
- Pass the exam as approved by the standards body.
The details of the bridging courses are yet to be determined however the level of additional education which a representatives is required to undertake will depend on their current level of qualification. Existing representatives will have two years to meet the requirements. Those who do not meet the requirements by 1 July 2019 will not be authorised to provide personal advice to retail clients from this date onwards.
Additional ASIC Powers
ASIC’s powers in relation to educational and training requirements include the ability to refuse AFSL applications to provide personal advice to retail clients where the applicants do not meet the training standards and the ability to ban a person if ASIC has reason to believe that the person was authorised when they had not met the three preconditions. Given ASIC has not issued a retail OTC derivatives AFSL in the past 14 months to 2 years, this additional power will not impact the industry significantly, however it will prove another hurdle for applicants to meet and another opportunity for ASIC to refuse an AFSL.
Given the many changes coming into force over the next three years, those who provide personal advice in relation to foreign exchange contracts and/or derivatives will need to be on the front foot in relation to compliance and training. We anticipate minimal changes to the draft legislation based on industry consultation, however the introduction of the standards body will see further clarification around the preconditions and the transitional requirements. This will provide AFSL holders, particularly FX brokers, and advisers alike the ability to accurately determine whether they will be compliant or the relevant steps they need to take to ensure compliance.
Alicia works across both Sophie Grace Pty Ltd and Sophie Grace Legal Pty Ltd with a particular focus on compliance and legal services. She manages the licensing and compliance aspects of the business. She is responsible for AFSL and ACL applications, variations and assists the compliance team in the implementation of compliance reviews. She provides ongoing compliance support and assists with the preparation of legal advice, commercial agreements and disclosure documents.