(July 6, 2006) Getting and then varying your licence

If you laid out every Financial Services Reform (FSR)-related Corporations Act and regulations amendment, Australian Securities and Investments Commission (ASIC) policy statement, class order, information release, financial services form, licensing kit, guide, refinement proposal and information statement end-to-end, you would have a paper trail long enough to reach the moon and back five times.

I can’t substantiate that claim, but I don’t think I’m far off.

Regardless, I know firsthand that advisers hesitate before getting or varying an Australian Financial Services Licence (AFSL). Information overload, combined with potentially increased legal risk and uncertainty, makes obtaining (and varying) an AFSL seem daunting.

Drawing from our experience in successfully obtaining numerous AFSLs and AFSL-variations, this article attempts to provide some practical tips to help you understand and navigate your way through the quagmire of FSR.

I’ve tried not to just regurgitate ASIC guidelines (which can be found on www.asic.gov.au), but offer useful tips and suggestions.

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Why get your own licence?

We receive lots of different reasons for applying for a licence from potential applicants who:

~ are unhappy paying licensee fees for the privilege of being authorised;

~ while running their own corporate authorised representative, want to be ‘their own boss’ in a truer sense;

~ n are tax or business specialists, who sit on the fringes of FSR and have some big deals they want to get involved in, but know an AFSL would be needed;

~ want to set up a new dealer group;

~ want to set up in competition with their authorising licensee (subject to any restraint of trade, of course);

~ are multinational companies wanting to set up in Australia;

~ have been issued a stop order from ASIC for operating an unlicensed financial services business; or

~ advise in property investment, but want an AFSL for good ‘marketing’.

Can you relate to any of these? After discussing the pros and cons of obtaining a licence, including the threshold issues required (see step one in the diagram), (please see Money Management Magazine July 6, 2006 page 16) we find that about two-thirds of enquirers don’t proceed immediately. They either seek an alternative to obtaining their licence (for example, become an authorised representative), complete further training, or try to find someone who would be more likely to meet the organisational competency requirements.

Organisational competency refers to the skills and qualifications of your proposed responsible officers, and really means responsible officer competency.

Responsible officers are the people appointed to oversee the provision of the organisation’s financial services.

Pros

The advantages of holding an AFSL are more obvious than the disadvantages.

You are your own boss. You have a licence that sets out exactly the ambit of your business’ authority. You can authorise others (usually for a fee) to come under your banner. You can apply to vary your licence to include any type of financial service that is listed under the Corporations Act and regulations, as long as you can show organisational competency.

You can operate your business anywhere in Australia, and be ‘ready for anything’ if you want to apply for licences in other countries, such as Singapore, the UK and the US.

You’ll also be on the front foot to tackle the money laundering legislation procedures, which will apply to most licensees, because there is slight overlap between the requirements of the proposed legislation and FSR.

Cons

The cost of compliance is the main barrier to entering the land of the AFSL.

If outsourced, the cost of obtaining a licence can easily exceed $10,000. The ongoing costs are much higher.

Annual compliance reviews (usually around $5,000 to $25,000), adviser reviews, annual financial audits (usually around $10,000), monitoring, supervising and training representatives (including authorised representatives), external dispute resolution scheme membership, legal costs, insurance costs and minimum funds requirements are factors that must be considered by potential licensees.

Some of the obligations listed above are waived if you’re only applying to provide financial services to wholesale clients, and others are waived if you don’t provide financial advice.

Uncertainty about whether you will even succeed in your application to obtain a licence is another consideration, as some aspects of assessment by ASIC are subjective.

However, uncertainty can be minimised by dealing carefully with the threshold issues (see step one in the diagram) (please see Money Management Magazine July 6, 2006 page 16).

The biggest threshold issue is organisational competency. Organisational competency is only a disadvantage if you don’t have someone in your organisation who meets one of the five alternatives in PS 164.104C.

If ASIC decides to reject your application, it then goes to a delegate, and you get to attend an informal hearing to put your case before it’s formally denied.

The other issue is the potential risk of personal liability for responsible officers under the new licence.

If a person is appointed as a responsible officer, and was not formerly an officer of the company, their new role within the company may mean that they now meet the definition of “officer”, thereby attracting the same duties and legal responsibilities as officers.

This might explain why, in an industry of less than 4,500 licenses, a survey conducted last year suggested there is turnover of around 100 responsible officers per month.

The process (see diagram Money Management Magazine July 6, 2006 page 16)

The process of getting your AFSL can be explained as a seven-step process:

1. Clarify threshold issues. The threshold issues, discussed above, must be clarified before you proceed.

If you don’t do this initially, ASIC will ask you to clarify these issues during assessment, after you’ve spent time and money getting to that stage.

In any application, ASIC will make its own assessment as to whether you actually need the licence for what you propose to do, whether you’re asking for the right authorisations, whether you or other proposed responsible officers have the competency required, and whether there are any other issues that merit further questioning.

Also, ASIC has in-house lawyers who might review your submissions, depending on the authorisations you’re choosing.

2. Consider the cost. What is your time worth to you? You’ll have to balance the cost of outsourcing the application or doing it yourself.

If you outsource it, you’ll still be quite involved in the process. If you do it yourself, you’ll need to create everything from scratch.

Your business procedures will need to meet the requirements of your proposed licence conditions, the Corporations Act and regulations, ASIC’s PS 164 and about half-a-dozen other policy statements, although this varies if you only plan to service wholesale clients.

Some potential applicants, when they’re faced with the costs, decide it isn’t viable to proceed as planned and look at their other alternatives (for example, remaining an authorised representative). This is particularly the case with one or two-person businesses.

3. Prepare the documentation. There are three categories of documentation: (a) the online form, (b) supporting proofs, and (3) underlying procedures.

ASIC’s Licensing Kit walks you through the questions in the online form, but is a bit sketchy.

The supporting proofs include a business description, a description of your financial resources and a description of your proposed responsible officers.

After they’re submitted to ASIC (see step five Money Management Magazine July 6, 2006 page 16), ASIC may ask for more proofs (up to 12 more). If you’re preparing the application yourself, make sure you follow the requirements of ASIC’s kit to the letter.

We would suggest adopting their requirements as headings, and going from there.

4. Finalise the issues that require external input. We’ve had applications being held up for months because accountants, insurers or banks have been slow in getting the required documentation into our hands for submission to ASIC. If you’re aware of the possibility, take action early.

5. Submit the application. The online application is submitted electronically (no surprises there). The proofs must be sent to ASIC within 20 business days of submitting the online application. We usually do it all on the same day.

6. Liaise with ASIC. If you’re applying for a miscellaneous financial product authorisation, be prepared for a very long wait (sometimes months) before getting a response from ASIC.

If not, and you’ve got plenty of relevant experience and have prepared thoroughly, the assessment stage could take as little as two weeks. ASIC’s response time will also be longer if you have a complex or unusual business model.

7. When you obtain an AFSL. ASIC will give you a draft licence. If you’re happy with it, it will issue you a final licence.

Beware that if you’re issued an AFSL in May or June, you’ll still be required to conduct a proper financial audit of your business. It is a requirement that you have this done each financial year you hold your licence — even if it’s only a few weeks until June 30. This assumes your financial year ends on June 30.

Varying

Licensees often want to vary their licences to branch out into other sectors of the financial services market.

One advantage of holding an AFSL is that you don’t need to apply for another one — you just add to the one you have.

The disadvantage of varying your licence is that it is very similar to, and almost as onerous as, applying for a new licence. However, you won’t be required to provide as many supporting documents as with the original application.

You’ll still need to go through the seven steps outlined above. In particular, you’ll most likely need to appoint another responsible officer with the requisite competence to oversee the provision of the new financial services that you’re planning to undertake.

Don’t be caught out. Some licensees treat a variation with contempt and don’t devote adequate resources or attention to the detail associated with the variation. This can lead to a number of problems, including the rejection of the application, at great cost to the licensee.

Top 10 tips

1. Organisational competency will make or break your application.

2. Get good legal advice on the need for a licence, and what types of authorisations you’ll need.

3. It may still be possible to get a licence if you’ve been a little bit naughty.

4. Financial proof documentation takes forever to prepare.

5. If you have overseas experience and you’re applying to be a responsible officer, make sure you can show knowledge of the Australian regulatory environment (this might require you doing a short course).

6. Decide whether or not to outsource the application or variation early. If you don’t have time to do it properly, outsource it.

7. Balance up the ongoing costs before proceeding — is it worth it?

8. Give yourself plenty of time to get your licence.

9. In the event that ASIC doesn’t think your number one applicant is competent under PS 164 during assessment, have one or two backup responsible officers.

10. Don’t cut corners.

What not to do

People often come to us after unsuccessfully obtaining or varying their licence themselves. Common mistakes are:

n assuming their many years of experience will satisfy ASIC’s organisational competency requirements as set out in PS 164;

~ ignoring ASIC’s Licensing Kit;

~ thinking ‘close enough is good enough’;

~providing insufficient information describing their business;

~ submitting too few responsible officers for complex business models;

~ providing unlicensed financial services in any shape or form; and

~ not ascertaining the correct types of authorisations for their proposed business model.

Often it’s a combination of many of these factors.

I hope, however, that after reading this article, you’ll be able to make an educated assessment about whether you’d like to go ahead with that application or variation.

When you’ve made that decision, good luck.

Paul Derham is a solicitor with Holley Nethercote.