Today’s podcast dealt with the compliance obligations if a variation of an Australian Financial Services Licence (AFSL) is needed. This is an opportunity for compliance professionals not only to demonstrate their strategic value to their employers, but also to foster good regulatory relationships with ASIC.
There has been a generally-accepted view that ASIC must accept an AFSL application. However, ASIC’s figures paint a different view:
In 2017-2018, ASIC considered approximately 2,879 applications, with 60 per cent relating to AFSL applications, 29 per cent relating to Australian Credit Licence (ACL); applications and the remaining 11 per cent relating to professional auditor registrations.
Of the 2,879 total applications, only 48 per cent (1,383) were approved, with 62 per cent of those applications approved in a form other than applied for by the applicant. Of the 1,383 approvals, 44 per cent were AFSL approvals and 52 per cent were ACL approvals.
These are scary figures. It means that industry is not approaching the licensing process with appropriate rigour. This article focuses on an AFSL variation application: How should your variation of licence progress?
1. Carefully consider the proposed new service. An additional authorisation means that your people, systems and processes must support the new business line. So firstly, do a review of your firm using s912A as a template of the mandatory requirements for your licence application.
2. Review your internal or external audit reports and compliance plan audit reports to determine if there are any areas that need specific focus.
3. Assess whether the responsible managers have skills in the new area. Developing a skills matrix that maps skills to the requirements of a Service is critical.
4. If there are knowledge gaps, assess which courses can help managers to upskill quickly. Consider which of the specific AFSL and other allied regulatory requirements (e.g. AUSTRAC) are met by the existing staff. It is important that from day one of the commencement of the new service, the requisite skills can be demonstrated. It is not enough to seek an AFSL variation and have inadequate skills at the time. The fit and proper check also extends to RMs’ criminal records. Update any relevant criminal checks prior to lodgement, as these can take up to 6 weeks to obtain and may delay the approval of the variation. Get references from suitable referees.
5. Assess whether you need additional regulatory capital. Can this be drawn from existing reserves, shareholders or capital raising of some kind, whether through financiers or external sources.
6. Assess the policies you have in place regarding your AFSL and AML/CTF obligations. Do they cover your new operations? If there are additional services or different products, do you need to expand your policies to embrace these new products? Are there additional risks—for example, moving into cash management? Any change in business risk must involve a change in your policies and an assessment against your risk management plan.
7. All new products need to be assessed against the ASIC product intervention powers. Even though the design and distribution powers do not come into force until 6 April 2021, ASIC can now access the product intervention powers to suspend sales certain financial products and credit products by making orders to prohibit specified conduct relating to those products, on an industry or individual basis, when the conduct is or is likely to result in significant detriment to retail clients.
As an issuer of a new product area, you should:
undertake a target market determination for any new product licence authorisation to determine the likely purchasers of the product and specific risks of those products i.e. are they suitable for a retail client? It is fair to say that more complex products (e.g. CDOs and some warrants) may not meet that test; and
your compliance measures must be assessed to ensure you have taken reasonable steps to ensure product distribution conduct is consistent with the new rules.
8. You should also review the current authorisations under your licence to determine if you wish to relinquish certain authorisations. It is better in a smaller financial institution to have authorisations only for those products that are offered by the licensee, as having a wide range of authorisations means you must have staff who have the skills and expertise in those areas. If you don’t, this can lead to issues with ASIC.
In summary, when applying for a licence variation, use this as a time to review the compliance program for your entity. Apart from product issues, carefully consider your compliance staff levels to ensure they are adequate for the whole of your entity and complexity of the product offerings. Failure to do so can be a breach of your AFSL. Remember also the need to report breaches under s912D. ASIC expects that regulated entities should have breaches to report. If an entity doesn't report any breaches, this can be indicative of a culture of cover-ups and disempowered compliance.