What Is Dealing in a Financial Product and When Do You Need an AFSL for It

Introduction

Under Section 766C of the Corporations Act 2001 (Cth) (‘Corporations Act‘), “dealing in a financial product” covers more than buying or selling. It includes applying for or acquiring, issuing, underwriting securities or interests in managed investment schemes, varying, disposing of, and arranging for another person to undertake those activities.

Businesses must classify their conduct accurately because the type of dealing can affect whether an Australian Financial Services Licence (AFSL) or particular authorisation is required. This article explains the distinction between direct dealing, arranging to deal and excluded conduct, while separating those questions from the licensing analysis.

Interactive Tool: Check If You’re Dealing in a Financial Product

Meaning of Dealing in a Financial Product under the Corporations Act

Applying for or Acquiring a Financial Product

Section 766C(1)(a) of the Corporations Act provides that applying for or acquiring a financial product constitutes dealing. The provision applies whether the conduct occurs as principal or agent.

Dealing can arise at an early stage of a transaction, before ownership or rights under the financial product have passed to the applicant. A person who submits an application for a managed investment interest, or acquires an existing financial product, may therefore be dealing under Section 766C(1)(a) of the Corporations Act.

Issuing a Financial Product

Section 766C(1)(b) of the Corporations Act provides that issuing a financial product constitutes dealing.

Under Section 761E(2), a financial product is generally issued when it is first issued, granted or otherwise made available to a person, subject to the product-specific rules in that section. The issuer's role may involve offering or marketing a product, but those activities are not, by themselves, the statutory test for issue. For Section 766C(1)(b), the relevant question is whether the product has been issued within Section 761E.

Underwriting Securities or Managed Investment Interests

Section 766C(1)(c) of the Corporations Act treats underwriting as dealing where the relevant product is a security or an interest in a managed investment scheme.

This limb is confined to those product categories. It does not refer to underwriting every type of financial product. The capacity in which each participant acts should be examined, because Section 766C(1)(c) of the Corporations Act applies to the underwriting of the specified securities or interests.

Varying a Financial Product

Section 766C(1)(d) of the Corporations Act provides that varying a financial product constitutes dealing. A variation may involve changing the terms of an existing financial product, rather than issuing a new product.

The analysis does not necessarily end when the financial product has been issued or acquired. A person who brings about a variation may need to consider Section 766C(1)(d) of the Corporations Act, while an intermediary that facilitates the change may need to consider whether Section 766C(2) of the Corporations Act applies.

Disposing of a Financial Product

Section 766C(1)(e) of the Corporations Act provides that disposing of a financial product constitutes dealing. Selling or transferring an existing financial product can fall within this limb.

The relevant conduct may involve the holder, an authorised agent, or another intermediary. An agent dealing for a client must be assessed separately from the client's own conduct, because Section 766C(1) of the Corporations Act expressly applies to conduct undertaken as principal or agent.

What Does Arranging to Deal Mean

When Does Conduct Amount to Arranging

Under Section 766C(2) of the Corporations Act, arranging for another person to apply for, acquire, issue, underwrite, vary or dispose of a financial product is also dealing. The provision can apply even when the intermediary does not complete the transaction itself.

The Australian Securities and Investments Commission (ASIC) explains in Regulatory Guide (RG) 36.38 that arranging involves negotiating for, or bringing into effect, a dealing in a financial product. Separately, RG 36.42–RG 36.46 explains that whether conduct amounts to arranging is a question of degree and identifies factors such as whether the intermediary's involvement is sufficiently important to the transaction and whether it significantly adds value.

As a result, a platform that merely provides access may be treated differently from one that:

• acts as a key intermediary whose involvement is important to bringing about the transaction;
• negotiates terms or otherwise significantly adds value to the transaction; or
• routes orders or takes other steps that bring the financial product transaction into effect.

Arranging to Deal Versus Financial Product Advice

Section 766C(2) of the Corporations Act excludes conduct from the arranging limb where the relevant actions amount to providing financial product advice. Financial product advice is defined by Section 766B(1) of the Corporations Act as a recommendation, statement of opinion or report intended, or reasonably regarded as intended, to influence a decision about a financial product.

The distinction concerns the character of the conduct being assessed. A recommendation about whether a person should acquire a financial product may be financial product advice, while completing or facilitating the later acquisition may separately involve dealing or arranging under Section 766C of the Corporations Act.

When Is Conduct Not Treated as Dealing in a Financial Product

Dealing on Your Own Behalf

Under Section 766C(3) of the Corporations Act, a person is taken not to deal in a financial product when dealing on their own behalf, whether directly or through an agent or representative. The exception applies where the person is an issuer of financial products and the transaction relates to one or more of that issuer's own products.

However, an agent does not receive the principal's exclusion. Under Section 766C(3A) of the Corporations Act, an agent dealing for a principal is not treated as acting on the agent's own behalf merely because the transaction is an own-account transaction for the principal.

Other Excluded Conduct

Several other exclusions may prevent conduct from being treated as dealing. For example, under Section 766A(3) of the Corporations Act, conduct is not the provision of a financial service if it is done in the course of work of a kind ordinarily done by clerks or cashiers. ASIC states in RG 36.52 that this type of work is generally routine, administrative, processing or receipting in nature.

The exclusions also include:

• Under Section 766C(2A), providing a crowd-funding service.
• Under Section 766C(4), transactions by specified governments and public authorities, bodies corporate, unincorporated bodies and CCIVs where the transaction relates only to securities of that entity or, for a government, debentures, stocks or bonds issued or proposed to be issued by that government. Section 766C(5) limits the Section 766C(4)(c) exclusion for certain entities carrying on an investment business.
• Under Section 766C(6), transactions by a sub-underwriter that relate only to the sub-underwriting.
• Under Section 766C(7), conduct prescribed by the Corporations Regulations 2001 (Cth) ('Corporations Regulations').
  • Regulation 7.1.29(3)(f), read with Regulation 7.1.29(1), addresses certain arranging in relation to interests in self-managed superannuation funds.
  • Regulation 7.1.29(3)(g), read with regulation 7.1.29(1), addresses specified administrative preparation of registration or transfer documents.
  • Regulations 7.1.34, 7.1.35 and 7.1.35A contain further exclusions relevant to dealing.

Practical Examples of Dealing in a Financial Product

Product Issuer Example

A responsible product provider issuing a managed investment interest, insurance product or another financial product may be dealing under Section 766C(1)(b) of the Corporations Act. A later change to the product's rights or obligations may also involve dealing by varying the financial product under Section 766C(1)(d) of the Corporations Act.

The specific statutory framework for the issuer and financial product must be examined. A company issuing its own securities may also need to consider the exclusion in Section 766C(4) of the Corporations Act, including the limitation in Section 766C(5) for certain investment businesses.

Adviser or Intermediary Example

An adviser who has authority to bind a client and acquires a financial product in the client's name may be dealing as the client's agent under Section 766C(1) of the Corporations Act.

An adviser who does not itself acquire the product but takes steps that amount to arranging for the client to acquire it may be dealing under Section 766C(2). ASIC explains in RG 36.49 that dealing as agent is not itself arranging, although a person acting as agent may also engage in separate conduct that amounts to arranging.

Further, recommendation about acquiring the financial product may also amount to financial product advice under Section 766B(1).

Investment Platform or FinTech Example

An investment platform that receives a customer's order and routes it to another broker may be arranging for the customer to acquire or dispose of a financial product under Section 766C(2) of the Corporations Act. The platform does not need to execute the final trade for arranging to become relevant, which may raise questions about whether a fintech needs an AFSL.

A platform that facilitates an application, disposal, or variation should be assessed by reference to its actual role and level of involvement, as discussed above.

Why the Type of Dealing Matters for AFSL

Dealing as Principal Versus Arranging

The capacity in which a business acts affects how its conduct is classified. Direct dealing under Section 766C(1) of the Corporations Act may be undertaken as principal or agent, while arranging under Section 766C(2) applies where a business does not complete the transaction itself but helps bring it about. The distinction should be reflected when assessing whether an AFSL authorisation covers the service being provided.

Financial Product Categories

An AFSL authorisation must cover both the relevant dealing activity and the type of financial product involved.

Section 911A(1) of the Corporations Act requires a person carrying on a financial services business to hold an AFSL covering the financial services provided, subject to the exemptions in Section 911A(2) and any other applicable exemption. Separately, ASIC's AFS licence application framework distinguishes dealing under Section 766C(1) from arranging under Section 766C(2) and requires applicants to select the relevant dealing subtypes and financial product authorisations, as part of the AFSL application process.

A business should not rely only on having an AFSL. Its authorisations should be checked against the financial product categories it applies for, acquires, issues, varies, disposes of or arranges for another person to deal with. If the scope is unclear, it is prudent to seek advice from AFSL lawyers in NSW.

When Should a Business Review Its AFSL Authorisations

As a practical compliance step, a business should review its AFSL authorisations when its products, transaction functions or customer processes change. Changes that may affect the classification of its conduct include:

• adding a new financial product;
• moving from referrals to processing transaction instructions; and
• changing the role of an adviser, agent, or platform.

The review should assess whether the business is dealing directly under Section 766C(1) or arranging under Section 766C(2) of the Corporations Act. Click Legal's Free AFSL Compliance Guide on Core Obligations for AFS Licensees can help you assess core obligations and authorisation requirements.

Common Mistakes When Assessing Dealing Activities

A common error is treating dealing as limited to buying or selling a financial product. In fact, Section 766C(1) of the Corporations Act also covers applying for, acquiring, issuing, underwriting specified products, varying and disposing of a financial product.

Businesses may also overlook the difference between arranging and providing financial product advice: arranging another person's transaction under Section 766C(2) of the Corporations Act can itself be dealing. In addition, the own-account exclusion in Section 766C(3) of the Corporations Act should not be assumed to protect an agent, because Section 766C(3A) treats the agent's conduct separately.

Practical Steps for Assessing Whether You Are Dealing

Assessing a financial product activity requires the business to work through the relevant conduct and licensing questions in sequence:

1. Identify whether the facility or interest is a financial product.
2. Check whether the conduct involves applying for, acquiring, issuing, underwriting, varying or disposing of the financial product under Section 766C(1) of the Corporations Act.
3. Identify whether the business acts for itself, as principal, as agent or as another intermediary.
4. Consider whether the conduct arranges another person's transaction under Section 766C(2) of the Corporations Act.
5. Check crowd-funding, own-account, agent, sub-underwriting and other applicable exclusions.
6. Assess whether the activity also involves advice or another financial service.
7. Confirm whether the relevant AFSL authorisations cover the financial service and financial product.

Conclusion

"Dealing in a financial product" under the Corporations Act includes applying for, acquiring, issuing, underwriting specified products, varying and disposing of a financial product, as well as arranging for another person to undertake those activities. Correct classification requires businesses to distinguish direct dealing, arranging, excluded conduct and the separate question of whether their AFSL authorisations cover the relevant financial service and product.

For businesses reviewing their model or transaction processes, contact Click Legal's AFSL lawyers for clear guidance on dealing activities and AFSL authorisations.

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