Applying for an Australian Financial Services (AFS) licence is a crucial step for those looking to operate an insurance underwriting agency. Our experts break down the regulatory expectations and practical considerations for the licensing process.
An underwriting agency is an agent authorised by an insurer to bind insurance cover, and in some cases handle claims on behalf of the insurer. Underwriting agencies usually specialise in a particular class of insurance (for example professional indemnity insurance) or insurance products/solutions designed for a particular profession, industry, customer group or market (for example, residential strata insurance). It can be business transacted through brokers or other intermediaries acting as referrers or third-party distributors such as real estate agents, property managers, or strata managers, or it can be business transacted directly with insureds, through a call centre, in-person sales or digital channels.
An insurer usually enters into a delegated authority or binder agreement with an underwriting agency. This gives the agency authority to issue contracts of insurance as an agent of the insurer and in some cases that authority extends to handling insurance claims for the insurer.
In most cases, an underwriting agency will hold an AFS licence to offer insurance products. It is possible for an agency business to be an authorised representative of an AFS licence holder that has the required financial services authorisations or to rely on other exemptions from holding an AFS licence.For example, if you act as an agent of an APRA-regulated insurer (or Lloyd’s) and you are dealing exclusively with wholesale clients.
If you intend to apply for an AFS licence, the first step is to determine if you do need a licence and, if so, what type. Once this is certain, consider what information you’ll need to prepare the licence application.
Licence authorisations
Typically, an underwriting agency needs to hold an AFS licence to:
- Provide general financial product advice on general insurance products; and
- Dealing by issuing, applying for, acquiring, varying or disposing of general insurance products.
If you have a delegated claims handling authority from the insurer to handle and settle claims, then you need to be licensed to provide claims handling and settling services.
Claims handling and settling services include:
- Making a recommendation or stating an opinion that could influence a decision whether to make an insurance claim.
- Assisting another person to make an insurance claim.
- Assessing whether an insurer is liable under an insurance product.
- Making a decision to accept or reject all or part of an insurance claim.
- Quantifying an insurer’s liability under an insurance product.
- Offering to settle all or part of an insurance claim.
- Satisfying a liability of an insurer under an insurance claim.
Some agency businesses are exempt from having a claims handling and settling services authorisation, and this depends on the type of service they provide to the insurer and whether their service is a primary part of their business.
For agency businesses that act on behalf of unauthorised foreign insurers, the agency may be exempt from the requirement to have an AFS licence if the unauthorised foreign insurer is also exempt from the requirement to have an AFS licence. If the insurer needs to make decisions about claims and the claims handling activities are not fully outsourced (i.e. the insurer retains authority for claim decisions above the delegated authority limit) then an unauthorised foreign insurer may need to have an arrangement with an AFS Licence holder in order to be exempt for its own claims handling/settling activities.
Agency businesses should take legal advice on the required financial services authorisations.
Your clients
You will also need to consider whether your AFS licence should cover retail or wholesale clients or both. The client is the insured or policyholder under the insurance product that you intend to offer.
For general insurance products, retail clients are individuals or small businesses that purchase insurance that has been designated as a retail insurance product. They include:
- Motor vehicle insurance.
- Home building and contents insurance.
- Personal and domestic property insurance.
- Travel insurance.
- Consumer credit insurance.
- Sickness and accident insurance.
A small business is one that employs less than 20 people (other than businesses that manufacture goods, where the limit is 100 people).
Anyone who is not a retail client is a wholesale client.
Demonstrating organisational competency
An AFS licence holder has an obligation to maintain organisational competence. This is demonstrated through the knowledge, skills and competency of the Responsible Managers.
Responsible Managers are persons who are directly responsible for the significant day-to-day business decisions about the provision of financial services, supervision of these services and the quality of the financial services provided. Typically, this will include people in an agency business who are designing, developing and underwriting the insurance products and overseeing the claims handling activities (where the agency engaged in those activities).
Whether a Responsible Manager has the knowledge and skills to fulfil the role comes down to whether the person qualifies under one of five prescribed pathways set by ASIC. These can be quite rigid and usually underwriting agencies require the person to have experience in underwriting or supervising others engaged in underwriting activities. This will also apply if you need to be authorised for claims handling, and at least one of your Responsible Managers must have experience handling and settling claims.
ASIC expects this experience to be regulated, this means it was gained in another licensed business engaging in the same type of financial services or whilst the business was acting as an authorised representative of an AFS Licence holder. In some circumstances, ASIC will consider overseas experience where the Responsible Manager has worked in a similarly regulated area.
For more information on the requirements for Responsible Managers, see our previous publication – Licensing Essentials: Responsible Managers in a Nutshell.
Fit and proper people
ASIC also requires that all Responsible Managers, officers of the AFS licence applicant, and officers of its controller/s undergo a “fit and proper” assessment. This involves evaluating their honesty, integrity, and professional competence.
Ensuring that the Responsible Managers and those in leadership positions meet these competency criteria is critical for a successful application. ASIC cannot grant a licence if the officers and Responsible Managers do not satisfy the Fit and Proper Person test. Find out more about the Fit and Proper Person Test in our previous article.
Meeting your conduct obligations
AFS licensees need to have documented business systems, such as operational policies and procedures, functional governance, compliance and risk management frameworks and controls, for all aspects of the financial services business to:
- Ensure that the financial services covered by your licence are provided efficiently, honestly and fairly
- have risk management and conflicts of interest arrangements in place
- comply with the conditions of your licence and the financial services laws
- ensure that your representatives comply with the financial services laws
- have adequate financial, technological and human resources to provide the financial services covered by your licence and to carry out supervisory arrangements
- maintain the competence to provide the financial services covered by your licence
- ensure that your representatives are adequately trained and competent to provide those financial services.
You must be able to show that you have arrangements in place to ensure compliance with these obligations from the time the licence is granted. ASIC will assess these obligations by asking you questions in the licence application and in some cases, you will need to provide detailed responses or provide further information to ASIC.
Additional requirements for licence applications covering retail clients
Professional Indemnity Insurance: unless exempt, an AFS licensee must hold professional indemnity insurance to provide financial services to retail clients. ASIC will request information about your insurance at the time they issue a draft licence.
The professional indemnity insurance policy must meet ASIC’s requirements, which are set out in ASIC Regulatory Guide 126: Compensation and insurance arrangements for AFS licensees. ASIC considers that a PI insurance policy must be for a minimum of at least $2 million for any one claim and in the aggregate.
AFCA membership: you are required to have an internal dispute resolution process when dealing with retail clients and you are also required to maintain membership with an external dispute resolution scheme, which in Australia is the Australian Financial Complaints Authority (AFCA). ASIC will only issue the AFS licence once you are a member of AFCA. Small business insurance clients can make complaints with AFCA for certain types of insurance products, including property insurance typically covered in a business package insurance policy including business interruption cover.
Binder Agreement: to support your application, ASIC also require a copy of your delegated underwriting authority from insurers (i.e. your binder agreement with the insurer). If the binder agreement is not executed because the insurer is waiting for the grant of the AFS licence, ASIC will typically accept the document in draft form.
How we can help
Hamilton Locke provides expert legal advice to the general insurance agency sector. Here are some of the ways we can help:
- Advise on whether you need an AFS Licence and what licence authorisations are required.
- Undertake Responsible Manager assessments to advise whether they will satisfy ASIC’s requirements to support an AFS Licence application and help with a change to Responsible Managers.
- Provide assistance with the AFS Licence application, preparing supporting documents licence proofs or reviewing the documents you prepare and then liaison with ASIC and providing technical and legal advice throughout the process.
- Our suite of compliance tools and templates to help you build your operational policies and procedures and help you to demonstrate that you have a compliance and risk program. This is available via our eStore.
- Delivering Responsible Manager Masterclasses. These are one-day courses for Responsible Managers and Compliance Professionals to support their professional development. We run these as public courses throughout the year, or we can be engaged to run a private in-house session.
- Our colleagues at Source can provide ongoing compliance support.
For more information, please contact Sónia Cruz, Charmian Holmes or Jaime Lumsden.
