Uncertainty over scope of Bill

THE eagerly awaited Financial Services Reform Bill will create a streamlined regulatory regime for financial service providers when it is introduced in March next year.

And while many core functions of the property industry will remain unaffected by the new scheme, experts are warning some of the sector’s activities could be caught by the far-reaching definitions of the Bill.

According to Phillips Fox partner Sol Majteles, real estate agents, valuers, managing agents and tenancy representation groups may be required to obtain an Australian Financial Services licence.

The FSR Bill is structured around the concept of financial products and services and advice pertaining to them.

As defined in the FSR Bill, a financial product is a facility that allows a person to make a financial investment, manage a financial risk or make non-cash payments.

And a person will be regarded as giving a financial service if they make a recommendation or give an opinion or report that is likely to affect a person’s decision about whether to acquire, retain or sell a financial product.

Mr Majteles said the phrase “financial investment” could be applied to include investment properties, which would concern most real estate agents.

“There is not a lot of difference between a property as an investment and other financial products, such as shares … both are financial investments,” Mr Majteles said.

As such, the FSR Bill could have a big impact on real estate agents, depending on the detail the Australian Securities and Investment Commission chose to attach to it.

“It could have a huge effect on real estate agents and how they give product advice,” Mr Majteles said. “It is not the property itself which is deemed a financial product but it is the things that hang off of it, such as insurance, mortgages and negative gearing that, if commented on, could be classed as financial product advice.

“If a commercial real estate agent says this property will give you a return of x per cent plus tax benefits, that could be deemed by ASIC as financial advice.”

As such, the real estate agent personally, or the entity that owns the agency, may need to hold an Australian Financial Service licence.

Activities of valuers and managing agents also could be touched by the definitions of the Bill.

Any valuation prepared in respect of a managed investment scheme and included in information provided to investors might be taken as financial product advice, as could a recommendation or stated opinion on insurance by managing agents of strata titles or other properties.

An industry source said the FSR Bill would not affect pure real estate transactions of buying and selling.

“But questions will arise depending on how you package the property, if you start adding on things, like insurance, then the Bill will apply,” he said.

“If a real estate agent managing rental properties offers insurance, for example against tenants doing damage to a property, to a client then that agent must have an AFS licence or be an authorised representative of the insurance company, because insurance is a financial product.”

He did not believe all real estate agents would be affected but noted there would be many.

To obtain an AFS licence, ASIC requires a number of criteria to be satisfied, including proof of adequate financial resources, competence, skills and experience to provide the relevant services and an adequate system of training and supervision.

Real Estate Institute of WA public affairs director Lino Iacomella said the full impact of the FSR Bill on the property sector was still very much unknown.

“It is an important issue for the real estate sector. We are not yet sure of the extent that real estate agents will be involved in the FSR Bill but we will be speaking to the Australian Securities and Investments Commission about its implications,” he said.

However, following an earlier ASIC report into the real estate industry, Mr Iacomella said the Commission and the national Real Estate Institute had come to an agreement regarding reasonable limits of financial advice.

“ASIC recognised real estate agents have a traditional role in providing advice on real estate matters, such as the capacity of a property to be leased out, the likely market value or the development potential,” he said.

“This is expected by their clients.

“But if agents go further and provide specific financial or investment advice based on an individual’s circumstances … then they need to be aware that they could possibly require a licence.”

Mr Iacomella said while the parametres and limits of the FSR Bill needed to be set, he did not think there would be widespread changes in the industry.

Teys McMahon Legal partner Greg McMahon agreed and said the FSR Bill would only apply to those real estate agents already covered by the Corporations Act licensing provisions.

“Of course the FSR Bill will trap people who should have been operating under the Corporations Act but, for whatever reason, were not,” Mr McMahon said.

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