ASIC Market Supervision Update Issue 38
Conflicted remuneration and stockbroking activities: No-action position for stamping fees and ASX24 brokerage
Part 7.7A of the Corporations Act 2001 prohibits the payment of conflicted remuneration and the charging of asset-based fees on borrowed amounts used to acquire financial products by or on behalf of a retail client.
Some kinds of stamping fees and brokerage fees paid in connection with stockbroking activities are excluded from these prohibitions. The terms of these exclusions are set out in the regulations.
There is some uncertainty about the scope and operation of these exclusions. To give effect to the policy intention of the Australian Government, and to provide certainty to the stockbroking industry, ASIC will adopt no-action positions regarding those aspects of the exclusions that have created uncertainty or have unintentionally fallen short of the intention of the Australian Government.
At this stage, the no-action positions will apply until 1 July 2014. The no-action positions, which are effective immediately, will be formalised in a revised Regulatory Guide 246 Conflicted remuneration (RG 246), which is scheduled to be published in the coming months.
The stamping fee exclusion in regulation 7.7A.12B of the regulations applies where the benefit is given by or on behalf of a capital raising entity to a provider (usually a broker) in relation to the provider dealing, on behalf of a retail client, in an approved financial product issued by the capital raising entity.
The circumstances under which the stamping fee is paid will usually be in relation to a dealing by the provider on behalf of a retail client. However, a stamping fee may also be paid to the provider where, in addition to the dealing by the provider on behalf of a retail client, the provider has subscribed for the product on its own behalf or the dealing is on behalf of a person who is not a retail client. There is uncertainty as to the extent to which the stamping fee exclusion applies in that scenario.
ASIC will not take action against a person in relation to the payment and receipt of a stamping fee in the circumstances described above to the extent the provider has subscribed for the approved financial product on its own behalf or the dealing in the approved financial product is on behalf of a person who is not a retail client. This no-action position also extends to circumstances where the provider, directly or indirectly, gives the benefit to a representative of the provider.
Similar to the stamping fee exclusion, this no-action position does not apply in circumstances where the capital raising entity is an “investment entity” within the meaning of that exclusion.
There are brokerage fee exclusions from the prohibitions on the payment of conflicted remuneration and the charging of asset-based fees on borrowed amounts used to acquire financial products by or on behalf of a retail client. These exclusions are set out in regulations 7.7A.12D, 7.7A.17 and 7.7A.18.
These exclusions apply in relation to dealings by a broker, on behalf of a retail client, in a financial product that is able to be traded on a prescribed financial market, subject to the requirements of the relevant exclusion being satisfied. Some exclusions require that the broker must also be a trading participant of a prescribed financial market.
ASX24 (formerly the Sydney Futures Exchange) is not a prescribed financial market. Brokers are therefore not able to rely on the exclusions in relation to brokerage fees for dealings, on behalf of a retail client, in financial products traded on ASX24.
ASIC will not take action against a broker seeking to rely on these exclusions in relation to brokerage fees for dealings, on behalf of a retail client, in financial products traded on ASX24, provided the requirements of the relevant exclusions are otherwise satisfied. In other words, for the purposes of the brokerage fee exclusions, ASIC will treat ASX24 as a prescribed financial market and will treat a trading participant of ASX24 as a trading participant of a prescribed financial market.
Market integrity rule obligations: Confirmations
ASIC would like to remind market participants of their obligations regarding the giving of confirmations, in particular to retail clients. In keeping with ASIC market integrity rule 3.4.1 (ASX Market), 'a market participant must give a confirmation to a person (the client), in respect of each market transaction entered into on the client's instructions or on the client's managed discretionary account.'
While the rules do not prohibit a copy of a confirmation being sent to an intermediary (although appropriate permission should be obtained from the client), the original confirmation must be sent to the client.
To ensure compliance with Rule 3.4.1, ASIC recommends that market participants consider their processes and procedures for operating client accounts, particularly where they involve intermediaries. For example, market participants should check as part of their monitoring program that confirmations have been sent and that they have been sent to the correct person under the rules (this may require checking of client addresses to ensure, for instance, that confirmations are not sent to the address of the intermediary).
Rule 3.4.1 protects the interests of retail clients by ensuring the transparency of market transactions and the accountability of market participants. The provision helps to ensure that market participants act in accordance with the instructions of their clients. ASIC considers it vital that market participants provide confirmations to their clients expediently, and in the manner and form prescribed under the rules. Of relevance is ASX Market Rules Guidance Note No. 3, which outlines when the ASX considered a Market Participant to have satisfied its obligations under the former Confirmations provision, Rule 7.9.1. Under that rule, ASX would not consider that a market participant had relevantly complied with it, if the confirmation was sent to an intermediary (including a financial planner).
Improving the quality of investment research: research reports
In December 2012, ASIC published Regulatory Guide 79 Research report providers: Improving the quality of investment research (RG 79). This contained updated guidance for research report providers, with a transition period to 1 September 2013 to allow licensees time to make the necessary changes to systems and business models to comply with our guidance. ASIC now reminds licensees giving personal financial product advice on how they can ensure that their research providers are providing quality research.
With the transition period having now come to an end, and compliance with the new guidance required, ASIC strongly encourages all advice providers to test the market for investment research. This should be done by re-evaluating the product offering of current or prospective third party providers, and by asking questions about their business model, conflicts of interest, and how they produce ratings and what they mean.
ASIC has produced 13-244MR Time to quiz your research provider, which includes a handy checklist on the above, and what types of questions should be asked.
Market participants should contact ASIC for market integrity issues and ASX and Chi-X respectively for operational issues. Contact ASIC’s Market and Participant Supervision group on 1300 029 454 and you will have these voice menu options:
- Option 1 for real time market matters
- Option 2 for other market related matters
- Option 3 for Participant enquiries or matters
- Option 4 for Market wide announcements.
Or you can reach the Market and Participant Team by email email@example.com, or through your relationship manager.