We begin by exploring who authorized and sub-authorized representatives are, followed by a discussion on their general and specific obligations to various stakeholders. Here, we examine various significant factors of the nature of authorization and sub-authorization, and the legal and practical aspects of the arrangements with reference to case laws and regulatory frameworks.

In particular, we look at the statutory obligations of the arrangements and other such duties stemming from common law due to the contractual nature of the relationship between licensees, authorizers, providers and clients. With the exception of licensees and authorizers, when we refer to "providers", we mean authorized and sub-authorized agents, but does not include customer service representatives, para-planners and trainee advisers. The later three entities are referred to as "third party representatives".

Moreover, we examine the relationship of authorized and sub-authorized representatives in their capacity as providers, and the obligations of licensees or authorizers in the event of a fiduciary relationship arising from such a client-provider relationship. Finally an outline of the regulatory framework governing representatives is presented, followed by a statement of the summary of the entire findings.

Authorized & Sub-Authorized Representatives

The Corporations Act 2001 (Cth) (“the Act”) states that an "... authorized representative' of a financial services licensee means a person authorized in accordance with section 916A or 916B to provide a financial service or financial services on behalf of the licensee.' The Act refers to an Australian Financial Services (“AFS”) license holder as a "market licensee." Entities capable of being authorized representatives are "individuals, bodies corporate, partnerships3 and individuals that act as trustees of a trust.

A trust itself cannot be an authorized representative". Authorized representatives can be appointed by a licensee to carry on business on behalf of the licensee. An authorized representative who is a body corporate can in turn appoint sub-authorized representatives to act on the authorizer's behalf. The Act specifically states that only a body corporate that is an authorized representative can be an "authorizer" - entity capable of appointing sub-authorized representatives.

The definition of "representative" of an AFS licensee or an authorizer takes on a broader meaning when such a representative is taken as an agent at law or purports to act in a representative capacity. The insertion of this broad coverage of would-be representatives triggers both statutory and common law interests where contractual issues come to surface.

A licensee cannot be an authorized representative of another licensee10 but an authorized representative can be an authorized representative of two or more licensees.11 AFS licensees who are insurers can grant other licensees who act under binders given by the insurers.

In the case of an authorized representative being such a representative for more than one licensee, there exists a possible conflict of interest situation. Where a licensee or authorizer provides an attractive package in terms of commission and other benefits to the provider,13 the provider is likely to promote to the client the products of the licensee that offers him/her the highest remuneration package.

Although a provider is charged to derive a reasonable basis for the advice, it is the provider's prerogative to derive such a reasonable basis and the law is silent on the maximum value of commission or promotional inducements that can be offered to a provider. Possible breaches of fiduciary duties under common law, given the broad definition of "representatives" in such cases have been highlighted on several occasions. Company executives who take on an active role in providing financial advice to clients are obliged under the financial services provisions covering them in their capacity as providers or authorizers as well as in their capacity as directors.

It is also worth mentioning the roles of third party representatives as the legal implications surrounding their position in the provision of financial services hierarchy places them at a crucial juncture. The Act recognizes them as providers but limited to "... basic deposit product or a facility for making non-cash payments that is related to a basic deposit product". ASIC sets out general rules of conduct for this class of persons under Policy Statement (“PS”) 146.

ASIC however states that only licensees and authorized representatives are "providing entities" and that any provision of financial services by third party representatives are merely a representation of the principal who can either be the licensee or the authorized representative. The Act further states the conditions under which one can be a representative of the principal in the capacity as an authorized or sub-authorized representative or as a third party representative.

ASIC also lays out some conditions (but not limited to), under which a provider will have acted as a principal. These conditions generally point to one key element: evidence of independence in providing financial services. In the event that such evidence is found to be true, where a provider conducts in a manner attributable to a principal rather than a representative and fails to meet these conditions, the provider will be required to have its own AFS license. The licensee is fully responsible for the conduct of its authorized and sub-authorized representatives and has indirect obligations to all third party representatives.

Licensee Obligations to Representatives:

General Obligations

Section 912A of the Act states broader obligations of licensees. Section 792A sets out some specific but general obligations in relation to authorized representatives, which licensees are required to perform and it further states their duties in compliance to ASIC and matters relating to fair market practice rules. ASIC is entitled to assess a licensee's compliance in relation to its obligations. Depending on the seriousness of the findings, ASIC may either refer its findings to affected persons if it has "material extent" and if in serious breach of the law, ASIC would refer to relevant authorities. ASIC summaries the main obligations of licensees under the following points:

"conduct and disclosure; the provision of your financial services; the competence, knowledge and skills of your responsible officers, as well as their good fame and character; the training and competence of your representatives and authorized representatives; compliance, managing conflicts of interest and risk management; the adequacy of your financial, technological and human resources, and; your dispute resolution and compensation arrangements (if your clients are retail clients)".

There are specific obligations that a licensee will have to perform mostly in the areas of compliance and competency, which, lack of either will have statutory and common law implications being borne by the licensee itself.

Specific Obligations

A licensee's specific obligations in relation to authorized and sub-authorized representatives are a combination of provisions in the Act and its Regulations and ASIC Policy Statements. Also, due to the contractual nature of the arrangement, a licensee's obligations extend to general law. Through PS146, ASIC as administrator of the Act sets out the minimum training requirements for financial product advisers. The term "financial product advisers" is used when referring to licensees and authorized representatives who provide financial product advice to retail clients.

ASIC requires all natural persons that are financial advisers who are themselves the licensees, authorizers, authorized representatives of corporate bodies or sub-authorized representatives, must all meet the minimum training standard required. It is therefore the role of the licensee to make sure it's authorized and sub-authorized representatives meet ASIC's minimum training requirements for the provision of all services that could possibly be classified as financial services. ASIC explicitly states that it is the "ultimate responsibility" of the licensee in making sure all financial advise providers under the licensee's umbrella are adequately trained and practice within their authorized limits.

In the event of financial advice being relayed by customer service representatives or provided by para-planners and trainee advisers, ASIC lays down the ground rules for proper practice. In particular, a customer service representative may only be allowed to provide financial product advice if the advice is:

"... Derived from a script approved by a person who meets the [PS 146] standards [PS 146.15A]; or made under the direct supervision of a person who meets the [PS 146] standards [PS 146.15B].

ASIC therefore enforces statutory contractual obligations on the part of licensees' to abide by those provisions and rulings drawn by way of policy statements. Failure to abide may trigger civil and common law proceedings. ASIC states various common law obligations that may arise when providing financial advice which includes the need to disclose conflict of interest situations, exercising due care, diligence and competency. ASIC's stand in the case of para-planners is that they do not necessarily need to be complying with PS146 unless otherwise if the para-planner:

".... Plays a material role in the provision of financial product advice to retail clients; and remains responsible (together with the licensee) for the provision of financial product advice to retail clients.

Furthermore, it is the licensee's duty to notify ASIC about the appointment of authorized representatives to offer financial services as prescribed. In the case of a sub-authorized representative, either the licensee or the authorizer can revoke the appointment and that revocation must be conveyed to the individual.

The licensee's duties also extend towards ensuring the authorized representative provide a Product Disclosure Statement (“PDS”) or a Supplementary Product Disclosure Statement (“SPDS”) of which, failure to do so entails an offence.Division 7 of Part 7.9 of the Act states the various offenses in relation to PDS or SPDS, particularly the obligation to make available such documents, defective status of PDS and unauthorized alterations.

It is an offence for a licensee to knowingly furnish a defective PDS to an authorized representative. It is the licensee's duty to ensure that a "providing entity" (includes authorized or sub-authorized representatives) who provide personal advice to clients, must comply with s 945A(1) which states the conditions under which such advice can be provided.

The Act states that the licensee is responsible for any "loss or damage" suffered by the client due to acting on advice provided by the licensee's authorized or sub-authorized representative. This creates a statutory obligation on the part of the licensee to make sure its authorized and sub-authorized representatives meet the minimum compliance and competency requirements. In any case, the arrangement between the licensee and authorized representative can be referred to as a standard principal and agent arrangement whereby the sub-authorized agent acts as a third party to the original contract.

A sub-authorized representative's actions are borne by the licensee which wouldn't, generally otherwise be the case in common law as the sub-contract would be between the authorizer and the sub-authorized representative. However, because of the statutory obligations of the licensee, the client is able to claim damages from anyone including authorized representatives and the licensee.

These claims can be restricted only to authorized representatives. Other licensees of whom the authorized representative acts as well, that could otherwise be held liable, can be excluded as well if an agreement was phrased in consideration of s 917F (6(b)) which effectively indemnifies them from any liability.

Authorized representative's obligations:

Obligations to clients

An authorized representative of one licensee or two or more licensees is obliged "…to give a Financial Services Guide if financial service provided to person as a retail client". Section 942C sets out what must actually be in a Financial Services Guide (“FSG”) provided by the authorized preventative. Licensees themselves are also required to furnish the same. An FSG must be provided if the client is likely to engage the "providing entity" (in this case the authorized representative), in the actual provision of financial services.

In the event that an FSG cannot be provided immediately, the provider must issue a statement stating the main components of the guide and other information specific to the client. The actual FSG must be provided within 5 days of the date of issue of the statement or earlier.

In providing financial advice, authorized and sub-authorized representatives must adhere to s945A(1) to derive a reasonable basis for the advice. The ASIC Act 2001 (Cth) (“ASIC Act”) states that there exists an "implied warranty" in any contractual nature which involves the supply and procuring of financial services between the provider and the client. As unsatisfied clients are likely to sue the providers, s 945A(2) acts as a defense provided the authorized representative meets all three requirements: Licensee provided the provider with adequate information or instructions; the provider failed due to reliance on s945A(1) and that the advice provided was appropriate according to the client's situation and was conclusive of investigations undertaken by the provider.

Furthermore, the provider must warn the client if the advice given was based on incomplete or inaccurate information. The provider is also obliged to issue a statement of advice (“SoA”) to the client. Section 947C sets out the main requirements for and when the provider is an authorized representative. When an authorized representative recommends the client an alternative financial product, the provider is obliged to provide all relevant information that could possibly arise from that transaction.

In complying with laws, regulations and directions issued by statutory bodies, authorized and sub-authorized representatives must have adequate training exposure to meet the ASIC minimum compliance and competency requirements. In the case of third party representatives, it is the duty of licensees, authorizers and providers to make sure any such persons under their authority to have them adequately trained to provide the right type of financial service to clients. Furthermore, the issue of fiduciary duties under statute and common law arising from the provision of financial services to retail clients posses an important situation where the provider is other than the licensee itself.

Fiduciary Issues With Providers

All providers have some kind of fiduciary relationship with clients. Generally, fiduciary matters arise from either a conflict of interest situation or "acting in the best interest of the beneficiary."

The scope of fiduciary relationships so far been has been narrowed in various instances. In Daly v Sydney Stock Exchange Ltd the essence of a fiduciary relationship as argued by the appellant was constructive trust, however, it was not enough to construe a fiduciary relationship for reasons that;

"... A constructive trust was on the one hand unnecessary to protect the legitimate rights of the lender and on the other hand could lead to consequences unjust both to the creditors of the borrower and the borrower itself...".

It is either not sufficient to claim defalcation, hence, "... The only relevant relationship between the firm and the appellant was that of debtor and creditor." Compared to standard contracts, fiduciary relationships have "conceptual and functional uniqueness". In Pilmer v The Duke Group Limited (in liq), the trial judge stated that a breach of contractual duties does not necessarily give way to a breach of fiduciary responsibilities, if the fiduciary acts in compliance to rules and regulations. The Full Court however concluded that the fiduciary had failed to act only in the best interest of the client.

This case further narrowed the fiduciary relationship owed by financial service providers to clients when it ruled that "... The relationship of chartered accountant and client has not yet been classified as one of the categories which, without more, gives rise to fiduciary obligations". It also made an added distinction in whether contributory negligence can be applied to breaches of fiduciary duty, stating that there are "severe conceptual difficulties" questioning the applicability of the notion in fiduciary breaches.

A further narrowing of the fiduciary obligations and exercise of skill and care was upheld in Rest-Ezi Furniture Pty Ltd v Ace Shohin (Australia) Pty Ltd (1987) 5 ACLC 10, where, a provider would have expressed reasonable skill and care if the provider understood the client's situation, which included the client's existing knowledge and ability to understand financial information provided. Where a fiduciary relationship of a such that the provider is the agent and agrees not to compete in the market against the client, a "... Fundamental principle of commercial morality will be gravely compromised".

The courts have therefore persistently narrowed the wider scope of fiduciary obligations which could have otherwise created a backlog of cases against providers, resulting in loss of consumer confidence. The court's stand is in line with ASIC's current approach in regulating the industry by focusing on a competency-based, compliance approach system, which is purported to hold licensees as the "unofficial regulators" of the industry while the ASIC and plays an overseer's role.

The argument of fiduciary relationships with clients and authorized and sub-authorized representative and third party providers is generally uncharted territory in law where majority of the direct, client-licensee cases seem to have ruled against the existence of any fiduciary relationships. A combination of self-regulatory reform initiatives and coherent enforcement of critical statutory provisions have not allowed for the exposure for any significant flaws in fiduciary relationships.

Regulatory Intervention

Even though there is a general trend in financial market reform which encourages compliance through promoting competency rather than through punishment, the core regulatory functions of the industry are centralized: ASIC administers the overall licensing and compliance process of all AFS matters.

The overall view of regulatory framework is to give investor confidence whilst ensuring a fair playing ground with minimum regulatory interference. ASIC's regulatory arm extends as far as the provisions of the law and regulations and its policy statements can take, and that generally covers the operations of the license, the license itself and all providers with their employees under that license.

It has the power to assess a licensee's compliance and where appropriate, if a representative holds out as a representative of a licensee, ASIC may disclose such information to the licensee.' ASIC has powers to make "banning orders" and exempt a person or a financial product as defined in these provisions. The Court may also, upon application by ASIC, disqualify a person permanently or for a specified period of time from providing any financial services. The Act also restrains the use of certain words or expressions unless otherwise authorized on license conditions.

The Regulations may exempt certain persons, financial products or even modify the provisions of the Act. In certain circumstances, the Court may also intervene: it has additional powers to make orders to void a contract in regards to damages suffered by a client.

The license itself is subject to conditions which the Minister (the Federal Treasurer - currently Peter Costello) can impose. The Minister can also ensure the license is in compliance with market rules which include; operating in the right market and trading the right products. As a measure of promoting compliance, the Minister may issue specific instructions to market licensees if they are found lacking in adherence.

The Minister can direct market licensees to furnish ASIC reports on specific matters. The Minister may further appoint ASIC or a qualified entity to carry out an audit on the special report and both to be submitted to ASIC within a specified time-frame. For clearing and settlement licensees, the Reserve Bank of Australia can also assess the licensee's compliance.

In enforcing compliance and competency, where authorized and sub-authorized representatives are involved, it is the licensee's obligation to make sure its representatives act in accordance with the laws and regulations. It is the added responsibility of regulatory and administrative entities, namely the Minister, ASIC and the Reserve Bank to investigate the actions of not only the licensee but representatives as well to ensure full compliance.

In the case of third party representatives, ASIC obligates licensees with the responsibility of every entity under their coverage to ensure competency and compliance.

Conclusion

The regulatory framework provides the basis in promoting compliance and competency between licensees and their providers, especially authorized and sub-authorized representatives in their various capacities as discussed above. ASIC ensures the above system is well and functioning through the administration of the relevant laws, such as holding the licensee "ultimately responsible" for the actions of its providers.

The Court and the regulatory agents seem to have a common understanding in enforcing a competency-based compliance approach, while consistently upholding a narrow interpretation of fiduciary relationships. In the case of "third party" representatives, it is the duty of both licensees, authorizers, authorized and sub-authorized representatives to make sure they are adequately trained to provide the right type of financial services to clients.

All in all, as the general aim of ASIC is "To provide a fair ground for providers and to protect the investments of clients", the compliance and competency mechanism plays a vital role in ensuring the overall implementation of a plausible system that ensures accountability on the part of both licensees and providers whilst guaranteeing consumer protection. It also paves the way for refining the regulatory framework in shaping the very mechanism.