Obtaining an Australian Financial Services Licence can be a challenge. Over the years I have observed that many applicants have been rejected or refused by ASIC, or find themselves struggling to comply after being licensed as they have not thought about the impact of the licence obligations. Below are some important questions that you should consider before applying for a licence.
1. Have you reviewed your business model to determine the type of AFS Licence you need?
It is important to review your business model and compare it to the type of licence that ASIC will issue. Your compliance obligations, which will be detailed on your licence, are also prescribed in the Corporations Regulations. These will differ depending on the authorisations on your Licence. For example:
• the financial obligations on your licence will be more onerous if you intend to hold clients’ monies; or
• you will be subject to more onerous compliance obligations if you intend to operate managed discretionary accounts.
If you apply for authorisations that you do not need, or don’t need yet, you will still have to spend time and money to comply with all the conditions pertaining to those unnecessary authorisations. But, if you don’t apply for the authorisations that you do need to operate your intended business, you could face ASIC action to remove or suspend your licence.
Reviewing the guidance available on ASIC’s website will provide you with some useful information. The Sample Licence Application details the range of the questions you will be asked. It also provides you with an overview of ASIC’s expectations of a licence applicant.
As a starting point, read the Licensing Kit which provides you with an overview of what an applicant must prepare, depending on the type of lIcence sought. ASIC Proforma 209 details all of the licence conditions that can be imposed on Licensees and it should be reviewed to determine some of the likely compliance scenarios.
AFS Licensing Kit
ASIC Proforma 209
2. Are you aware of the costs of obtaining and maintaining a licence?
Many potential applicants believe that the only cost in obtaining a licence is the initial application fee and the cost of PI Insurance. However, there are a number of other costs that need to be factored in when weighing up the cost of obtaining a licence versus the cost of remaining authorised by an existing licensee. These may include:
• Membership of an external dispute resolution system (only if you have retail clients);
• Ongoing cost of audit by a registered company auditor which covers financial and compliance audits;
• Cost of developing, implementing and maintaining compliance systems and procedures;
• Annual cost of lodging documents and auditor’s report;
• Maintaining details of your advisers on ASIC’s register of Financial Advisers;
• Ongoing training of your responsible managers and advisers
Regulatory Guide 126
Regulatory Guide 165
Regulatory Guide 166
Media Release 15-071MR
3. How do you propose to conduct your business?
Using the correct structure is also important. As a licensee you will be subject to ongoing financial requirements. These include a requirement to have sufficient financial resources to meet your anticipated cash flow expenses and be solvent. There may be other financial requirements, depending on the business you intend to conduct. It can be quite tricky to ascertain this, so you might wish to consult an external compliance consultant to provide advice.
The level of financial requirement imposed becomes more onerous depending upon the type of financial services business you propose to operate, for example, if you want to be a fund manager different financial requirements apply depending whether you choose to have retail or wholesale investors. These financial requirements are licence conditions and will be subject to an audit by your registered company auditor.
It is important to obtain a licence using a vehicle that is not going to be impacted by any other businesses in your group. There have been a number of licensees who have cancelled their AFS licence soon after it was issued because they found that they were conducting another business that directly affected the financial conditions imposed on the Licence.
AFS Licensing Kit
Regulatory Guide 166
4. Do you have sufficient responsible managers who meet the organisational competencies?
One of the key factors in obtaining a Licence is to demonstrate that you have senior people who meet the competencies covering the licence authorisations for which you have applied. This is the critical part of the application and one which causes most of the delays in assessing an application.
It is most important that the persons nominated as responsible managers have both the knowledge and skills covering all of the authorisations applied for and that they are directly responsible for the day-to-day decisions of the proposed licensee. When applications rely on “professional” responsible managers, ASIC now asks in-depth questions to check their proposed roles and responsibilities. This can considerably delay an application, or the application may be unsuccessful.
Where the applicant is a small business requesting less complex authorisations it is possible that one responsible manager is sufficient. However, more complex licence authorisations , where an applicant intends to undertake a broad range of financial services, may require more than one responsible manager.
When preparing the Licence application it is important that each of the responsible managers carefully detail their experience that is relevant to the authorisations for which they have been nominated.
AFS Licensing Kit
Regulatory Guide 105 (Link to ASIC website)
5. Do you have the time and the support to develop the documentation and procedures necessary to submit a Licence application and to comply?
An important question is whether you have the time to understand what information ASIC requires and prepare all of the documentation needed to gain a license. From my experience a high percentage of applications submitted to ASIC are rejected because the documentation submitted is inadequate.
ASIC requires certain documentation to be submitted with the application (called core proofs) but reserves the right to request other documentation to be submitted as part of the assessment (non-core proofs). Sometimes, ASIC may ask for explanations where the information is unclear, so it’s important to have well written, concise applications.
ASIC has provided some guidance to assist in preparing these documents. However, these will need to be reviewed on an ongoing basis as the laws change and businesses grow and evolve.
Apart from the licence application, you need to consider whether you have the time and expertise to develop your compliance documents. If you don’t, you may wish to consider engaging an external compliance consultant, particularly if your organisation is small and it makes sense to outsource.
Keep in mind the fact that you are required to comply as soon as you receive your licence, even if you have not yet commenced business.
AFS Licensing Kit
Regulatory Guide 104