Australian financial services (AFS) licences are not set and forget. As your business changes, so does your AFS licence. We take a look at when variations are required, plus some tips and traps to help navigate the licensing process.
When is a licence variation required?
As a business changes, you need to consider whether your AFS licence continues to be fit for purpose. This means considering whether the changes to your business will be covered by the current licence authorisations.
If any proposed financial services are not covered by the AFS licence, then before offering them, you must first apply to ASIC to vary your AFS licence.
So, what changes will require you to vary your AFS licence? Here are some common examples:
- Departure of a key person named on your licence or other licence conditions;
- Changes to the types of clients to which you will provide financial services; and
- Providing new financial products or services.
An AFS licence variation involves ASIC taking a similar assessment approach to what they do for a new AFS licence. As a result, the documentation that you provide to ASIC to assess the application is very similar to when applying for a new licence, and the time it takes ASIC to assess and grant a licence variation is also very similar to a new licence application.
| Tip
ASIC have published service standards for assessing licence applications. ASIC aims to assess and vary 70% of AFS licence applications within 150 days of receiving a complete application and decide 90% of complete applications within 240 days. So, there is a 30% chance that an application will be considered in less than 150 days and a 10% chance that it could take over 240 days. Prepare your AFS licence variation well in advance of launching a new business, as there are no shortcuts to speeding up the ASIC review process. Be aware that certain types of complex applications are more likely than others to exceed processing times. |
Key person or other licence conditions
A key person condition is generally placed on an AFS licence when an AFS licensee is heavily dependent on the competence of one or two responsible managers (RMs). These RMs are named in the Key Person Requirements section of the AFS licence.
Where there are changes to your key persons – for example, where one of your RMs leaves your business or ceases to be an RM within your organisation – you are required as part of your licence conditions to:
- Nominate another RM/s to replace the key person, or if another person/s have not been appointed, provide ASIC with reasons; and
- Demonstrate to ASIC that your organisation will continue to have the organisational competence for the financial services or products you provide.
AFS licensees have an ongoing obligation to notify ASIC of any changes to their RMs (including where a key person condition is imposed). An AFS licensee with a key person condition on their licence will need to notify ASIC in writing within five business days of the following:
- The date the officer or key person ceased to be an officer or to perform the role of an RM;
- The key details of any RM that is to replace the key person including, their name, address, date of commencement, educational qualifications and experience; and
- If an AFS licensee does not have a replacement person or key person, detailed reasons as to why no replacement person has been nominated.
You are likely to have a key person condition on your licence if you have only one RM, you applied for your licence with only one RM, or if ASIC takes the view that you are reliant on one particular person.
| Trap
Simply adding additional Responsible Managers does not change the key person condition requirements. You must specifically ask to vary the licence if the key person condition no longer applies or the key person ceases to perform the RM role. Failure to comply with the key person condition is a reportable breach. |
Client types
If you intend to offer your services to a new client segment or group, consider whether your licence currently covers the relevant client group, i.e., are the new clients retail and or wholesale clients? If the licence does not cover them, then you will need to vary your AFS licence before you engage with those clients.
For example, a general insurance underwriting agency may provide construction insurance for commercial builds, which is a wholesale client insurance product. If that underwriting agency wanted to expand its product range to provide home and contents insurance to the directors of its existing client base as a value-add service, then before doing so, they would need to vary their licence to cover retail clients because home and contents insurance is a retail client insurance product.
| Tip
Know who your typical clients will be. ASIC will need you to provide them with information in the licence variation about who your typical clients will be for each financial service and product you intend to offer. |
Adding an authorisation to provide financial services to retail clients requires you to provide more information to ASIC than for a wholesale client authorisation. This is because there is greater focus on consumer protection of retail clients. Specifically, to support a successful licence variation for retail clients, consider the following:
- Whether you have RMs with retail client experience to meet ASIC’s prescribed pathway for Responsible Managers. At least one RM must also be RG146 compliant and, for financial planners, satisfy the Relevant Provider training requirements. See our Responsible Manager article for more details;
- Whether the licensee has an internal dispute resolution system and holds membership with AFCA;
- Whether the licensee has adequate arrangements for compensating clients for loss or damage suffered as a result of a breach of financial services laws. This is usually done by holding professional indemnity insurance unless an exemption applies.
In addition, for specific financial products where you are extending the services to cover retail clients, ASIC will also require you to provide additional information as part of the licence application, for example:
- Where you are a financial planner and will provide personal advice to retail clients, then you will need to provide ASIC with details about your program for monitoring, supervising and training representatives where you have more than five advisers in your business;
- Where you are operating an underwriting agency to issue general insurance to retail clients under binder, you will need to provide ASIC with details about your underwriting agency binder agreement;
- Where you will be the operator of an investor directed portfolio service (IDPS) to retail clients, you will need to provide ASIC with a number of additional documents about the operation of the IDPS;
- Where you will issue life insurance to retail clients, you will need to provide ASIC with information about your agency arrangement;
- Where you will issue managed discretionary accounts (MDA) to retail clients, you will need to provide information about the operation of the MDA;
- Where you intend to issue margin loans to retail clients, you will need to provide information about the margin lending facility.
Ultimately, ASIC has the discretion to ask for any number of documents when considering a licence variation and at times they will ask to see any of the above documents, even if you are intending to only offer these financial services to wholesale clients.
The types of clients you have will also impact the conditions ASIC places on your AFS licence.
Financial products and services
An AFS licence variation will also be triggered when you seek to provide more or different financial products or services as part of a change to your business.
For example, you may only be authorised to provide general advice as part of your financial product advice authorisation. If you intend to expand your business to provide personal advice, you will need to seek a variation of your licence.
In some circumstances, changes to products and services may be a result of changes to regulation which brings a previously unregulated product into the ambit of regulation. This often involves a transition period to give applicants enough time to prepare and apply for a licence or variation. For example, reforms are likely to mean that payments and cryptocurrency exchanges will be captured by the AFS licensing regime in the future.
Payments reforms are expected to be introduced in the next 12 months. See our previous article on payments licensing for more information.
Digital asset facilities (DAF) will also be a new type of financial product under the Corporations Act 2001 (Cth). Anyone operating a DAF will need to hold an AFS or vary an existing licence to have certain authorisations.
It is important to keep these regulatory changes in mind when considering which products or services you are seeking to offer and any variations required under your AFS licence.
Demonstrating organisational competency
Regardless of whether you are applying for or varying an AFS licence, ASIC will want to know that you have the organisational competency needed for the financial services you intend to provide. ASIC assesses an applicant’s organisational competency through the knowledge and skills of your RMs, so you need to consider your existing RMs when varying a licence, as ASIC will assess these persons against the new financial services that will be provided. If your existing RMs do not have the qualifications and experience needed, then you will need to add additional RMs that can demonstrate the organisational competency in relation to the new financial services.
The key components of licence variations
There are five parts to an AFS licence variation application:
- An online application – referred to as the ASIC FS03 form. Plus, if you are adding additional RMs as part of the licence variation, you also need to prepare and lodge the ASIC FS20 form plus people proofs for the new RMs.
- Core proofs – these include a Business Description and an Organisational Competence Proof.
- Fit and proper persons proofs – the Licence applicant’s ‘officers’ and the ‘officers’ of its controller are required to demonstrate they are fit and proper. See our recent article on this topic.
- Complex product proofs – only required for complex products such as derivatives, foreign exchange, custody, responsible entities, CCIV, crowdsourced funding etc. This is an additional proof designed to demonstrate the licence applicant’s capacity to provide services in relation to these more complex products.
- Additional proofs – in certain circumstances, additional proofs are required. For example, when key business activities are outsourced, the licence applicant’s procedures for managing outsourcing are required. Additionally, ASIC may ask to see further documents pertaining to the licence applicant’s arrangements for its representatives, training, resource adequacy, product research, dispute resolution, compliance, risk management or compensation arrangements.
You will need to prepare all the required proofs before lodging the variation application as they must be uploaded to ASIC’s document management system at the time you submit the application. ASIC will only assess complete applications, so make sure you lodge the licence variation application with all the required supporting documents, otherwise, ASIC may reject the application and require you to re-apply when you have all the required supporting documents.
Key tips
- Before launching a new business or service, consider whether you have the right licence and whether a licence variation is required. If in doubt, contact Hamilton Locke for advice.
- Remember that you need to prepare the relevant proof documents as part of your variation.
- Consider whether the RMs on your licence meet the organisational competency requirements for any additional authorisations you are seeking.
- Remember that the types of clients you have (e.g. retail and / or wholesale) will impact the conditions that ASIC places on your licence.
Get in touch
If you require advice or guidance on whether a new business service or product is covered by your licence, or if you need help with a licence variation, contact us for more information.
For more information, please contact Jaime Lumsden, Sónia Cruz or Ruth Fesseha.
