Dealing and providing custodial or depository service as secondary service
This is Information Sheet 141 (INFO 141).
A secondary service is a financial service provided to a retail client via an intermediary.
If you are a secondary service provider, you may need to hold an Australian financial services (AFS) licence and comply with particular obligations under the Corporations Act 2001 (Corporations Act).
This information sheet explains:
- the requirements that apply to a secondary service provider
- when dealing or providing a custodial or depository service via an intermediary may be a secondary service
- the class order relief we have given from the requirement for a secondary service provider to give a retail client a Financial Services Guide (FSG), and
- the obligations that apply to the intermediary.
The obligations of secondary service providers who provide financial product advice are discussed in Regulatory Guide 175 Licensing: Financial product advisers—Conduct and disclosure (RG 175).
What requirements apply to secondary service providers?
If you are a secondary service provider, you may need to, among other things:
- have an appropriate retail AFS licence authorisation;
- have dispute resolution processes in place: see section 912A and Regulatory Guide 165 Licensing: Internal and external dispute resolution (RG 165)
- provide an FSG about the service you are providing (see Subdiv A, Div 2, Pt 7.7 of the Corporations Act and RG 175)
- meet the requirements in Regulatory Guide 146 Licensing: Training of financial product advisers (RG 146) and related training requirements if advice is provided
- satisfy general advice warning requirements if general advice is provided (section 949A), and
- have in place arrangements for compensating clients for loss or damage suffered because of a breach of an obligation in Ch 7: see section 912B and Regulatory Guide 126 Compensation and insurance arrangements for AFS licensees (RG 126).
Dealing as a secondary service
A secondary service can be provided when an AFS licensee (or authorised representative) deals in a financial product via an intermediary (see section 766C) by issuing a financial product to a retail client via the intermediary, or by applying for, acquiring, varying or disposing of a financial product on behalf of a retail client via the intermediary.
If you are dealing (as defined in section 766C) because you issue a financial product, the person acquiring the financial product is your client.
If you deal by applying for, acquiring, varying or disposing of a financial product on behalf of retail clients via an intermediary, the retail client will be your client. As this is a secondary service, you must meet the requirements in the Corporations Act that apply when financial services are provided to retail clients.
Similarly, if the intermediary is an agent for a retail client, the retail client will be your client (i.e. a client of the secondary service provider) and you will provide a financial service to that retail client.
However, if the intermediary is the agent for a retail client, but contracts in terms that imply that they are the principal, the intermediary can ordinarily be treated as the principal without inquiring further. Also, you do not need to treat the retail client of the intermediary as your client if the intermediary (or another wholesale client) acts as principal. For example, if the transaction is executed in the name of a trustee or custodian, they will be your client and your obligations will be to the trustee or custodian. The nature of those obligations will depend on whether the trustee or custodian is a wholesale or retail client.
Providing a custodial or depository service as a secondary service
A secondary service can be provided when an AFS licensee (or authorised representative) holds financial products on trust for a retail client of an intermediary (instead of on trust for the intermediary) under an arrangement with that intermediary who has an arrangement with the retail client. In this case, the AFS licensee (or authorised representative) will be providing a custodial or depository service to the retail client (see section 766E).
If financial products are held on trust for the retail client of an intermediary (instead of on trust for the intermediary) under an arrangement with that intermediary who has an arrangement with the retail client, the holder of the products will be providing a custodial or depository service to the retail client: section 766E.
This is, therefore, a secondary service and the holder (the secondary service provider) must satisfy the retail client requirements of the law. This is subject to any other exceptions in the law that may apply: see, for example, section 766E(3).
However, if financial products are held on trust for the intermediary (instead of on trust for their retail client), the holder will be providing a custodial or depository service to the intermediary, and not to their retail client. This arrangement is not a secondary service.
The requirement to provide an FSG
Generally, a person who provides a financial service to a retail client will have to provide that retail client with an FSG: sections 941A and 941B. While section 940B exempts a person providing financial services from having to provide an FSG where there is ‘no reasonable opportunity’, this exemption will only apply to secondary services in rare cases: see, for example, Example 4 in Table 7 of RG 175. This is because a secondary service provider could obtain the contact details of the retail client from the intermediary.
We recognise that there may be practical difficulties in providing an FSG in cases where the providing entity does not have a direct relationship with the retail client. If you are a secondary service provider, there are a number of ways in which you can overcome this practical difficulty, including by:
- relying on class order relief (see below);
- arranging for the intermediary to give your FSG to the retail client. In this case, the intermediary would be acting on your behalf. It would be up to you to structure your arrangements in a way that will give you sufficient certainty that the intermediary actually provides the FSG to the retail client in a way that satisfies your legal obligations. If the FSG is not provided, you will have breached the law (unless you are under a mistake of fact: see section 952C(2) and sections 6.1 and 9.2 of the Criminal Code);
- entering into a written agreement with the intermediary (see below);
- structuring your relationship with the intermediary in such a way that you avoid providing a secondary service to the retail client ;
- including requirements in your agreement with the intermediary for the intermediary to provide you with the address details of the retail client—you could then provide the FSG to that client; or
- preparing a combined FSG with the intermediary incorporating information about the financial service that you both provide to the retail client. However, you remain responsible for ensuring that the FSG is actually provided to the retail client in a way that satisfies your legal obligations.
Under ASIC Corporations (Financial Services Guides) Instrument 2015/541, we have granted:
- facilitative relief to allow the author of an ‘expert report’ to include its FSG as a separate and clearly identifiable part of the expert report that is prepared for inclusion in a third party’s disclosure document (e.g. a prospectus or Product Disclosure Statement (PDS)) provided certain conditions are met, and
- relief to allow an FSG for a person arranging for the issue of a financial product by a product provider under an intermediary authorisation (section 911A(2)(b)) to be included as a separate and clearly identifiable part of the product provider’s PDS provided certain conditions are met.
Exemption under reg 7.7.02(7)
As a secondary service provider, you may be exempt under reg 7.7.02(7) of the Corporations Regulations 2001 from the obligation to give an FSG if you enter into a written agreement with the intermediary under which the intermediary agrees to give your FSG to the retail client or inform the retail client how to obtain your FSG.
What obligations does the intermediary have?
Intermediaries should consider whether they are providing financial services to retail clients. The fact that an entity provides a secondary service to a retail client does not affect the question of whether the intermediary also provides a financial service to the retail client. If the intermediary is also providing a financial service to a retail client to whom they pass on a secondary service, then they will also need to meet the requirements in the Corporations Act that apply when financial services are provided to retail clients.
In addition, because the intermediary bundles its financial service with the secondary service provider’s financial service and then makes the bundle of services available to the retail client, we would expect that, in meeting its obligations under the law and its AFS licence, the intermediary would explain what services are being provided, who is responsible for each service and how the retail client could contact the responsible service provider if the client has any questions or complaints.
Where can I get more information?
- Ask us a question
- Call ASIC on 1300 300 630.
Please note that this information sheet is a summary giving you basic information about a particular topic. It does not cover the whole of the relevant law regarding that topic, and it is not a substitute for professional advice. You should also note that because this information sheet avoids legal language wherever possible, it might include some generalisations about the application of the law. Some provisions of the law referred to have exceptions or important qualifications. In most cases your particular circumstances must be taken into account when determining how the law applies to you.
Information sheets provide concise guidance on a specific process or compliance issue or an overview of detailed guidance.
This information sheet was issued in April 2011.
References to relief instruments in this information sheet were updated in August 2015 because these instruments were reviewed as part of the sunsetting of legislative instruments under the Legislative Instruments Act 2003.