Australian Financial Services Licensees With Wholesale Clients – Compliance Responsibilities To Consider

Australian financial services licence (AFSL) holders must comply with the general licensing obligations under the Corporations Act, including:

  • ensuring financial services are provided efficiently, honestly and fairly
  • complying with licence conditions and financial services laws
  • managing conflicts of interest
  • ensuring that representatives comply with relevant licensing obligations and are adequately trained and competent
  • maintaining competence through the responsible managers who must keep up-to date with changes to relevant laws and ASIC regulatory policy
  • having sufficient financial, technological and human resources
  • being adequately resourced to carry out supervisory arrangements
  • ensuring that the risk management system is adequate.

Failure to comply with any of the general licensing obligations could mean that the licence holder is not providing financial services efficiently, honestly and fairly, depending on the nature of the actual or suspected breach and whether they could be considered significant.

The extent of the processes to comply with the Corporations Act general licensing obligations, licence conditions and financial services laws is determined by the nature, scale and complexity of the business. This includes the type of financial products and services provided, volume and size of the transactions, number and type of clients (wholesale or retail), the organisation structure and location of operations, size of the enterprise and the extent to which it relies on external service providers. In conducting their financial services business, it’s important for licensees to have proper internal processes to regularly check and report on the effectiveness of their compliance policies, particularly in terms of regulatory requirements, including identifying, escalating and reporting breaches to ASIC, among other things.

Management of conflicts of interest requires the identification of potential conflicts of interest and applying appropriate treatments. This includes potential conflicts between a licensee and its clients, the licensee’s responsible managers and staff of the licensee and with clients to whom they provide financial services to clients. Additionally, it is important to consider how clients are treated between each other and to ensure that the interests of one client is not preferred over another client’s.

Licensees must consider how they will ensure that their responsible managers and their representatives (people who provide the financial services on behalf of the licensee) continue to be competent in their roles and responsibilities. Competence includes technical knowledge about the financial products for which the licensee is authorised and how to provide financial services and products in a manner that complies with applicable regulatory requirements. Significant breaches can result in a range of regulatory action including licence suspension, licence cancellation or enforceable undertakings, all of which will impact adversely on licensees. In addition, individuals may be banned for a period of time or permanently.

If a person is appointed as a responsible manager or a senior manager of an AFSL holder solely to maintain organisational competency for the licensee, it is unlikely that they would be held personally liable unless they contributed to any breach. A responsible manager or senior manager who is also an employee who provides financial services or a director of the licensee will be personally liable if their actions led to significant breaches by the licensee or where the director’s duties are breached. They must have the requisite skills and knowledge and be directly responsible for significant day-to-day decisions about the ongoing provision of financial services.

Resourcing considerations cover staffing and consultants, external service providers, technological needs, and having sufficient funds to meet the financial conditions of the licence. The financial requirements will vary, depending on the type of financial product and service offered. Additionally, licensees must budget for compliance/risk management personnel and where warranted, internal auditors, to monitor and to report to management and the board of directors.

Each licensee must have an adequate risk management system to identify, evaluate and mitigate its potential risks to a level acceptable to the board of directors. Risk management systems must be based on a structured and systematic process that enables the rating and ranking of risks based on their potential impact and likelihood. Properly managed, a risk management system can assist a licensee in its business development and the allocation of its resources more efficiently.

Directors ultimately bear responsibility for the operations of their licensee companies. Directors are required to exercise their powers with the standard of care and diligence that a reasonable person would use in similar circumstances. They are expected to direct licence holders to operate in a manner that complies with laws relevant to the company and the licence conditions. Directors must not wait for auditors to conduct the annual licensee audit and to report on any breaches they may uncover in the course of their audit. They are expected to ensure that a licensee complies from the day that it is granted its AFS licence and at all times onwards. It is in the directors’ best interests to ensure that there are suitable systems and processes in place and properly qualified personnel, consultants and service providers with appropriate skills and experience to enable licensees to operate efficiently, honestly and fairly.

This article is intended only for Australian licensees with wholesale clients based in Australia. It does not cover those licensees with retail clients. This is not legal advice and is for general information only. Readers should seek their own legal advice from legal firms. We can assist licensees to develop policies and procedures and to conduct compliance monitoring, supervising and reporting that takes into account their licence conditions and the general obligations of a licensee set out in the Corporations Act. We have significant practical experience as compliance consultants to licensees. This includes being approved by ASIC to act as compliance consultants to licensees that provided enforceable undertakings to ASIC.