Change is on the horizon for licensing in carbon financial services. Are you ready?
From January 2025 the Clean Energy Regulator will begin issuing safeguard mechanism credit units (SMCs) to entities responsible for large industrial facilities to whom the safeguard mechanism applies (termed ‘safeguard facilities’). As SMCs are a financial product regulated under the Corporations Act, if you will be providing financial services in relation to these or other emissions units, then you may need to hold an AFS Licence.
Here are some insights into navigating the updated licensing landscape for carbon financial services, including SMCs.
What are carbon financial services?
Regulated carbon credit units include:
- Australian carbon credit units (ACCUs);
- Eligible international emission units (EIEUs); and
- Safeguard mechanism credit units (SMCs).
ACCUs and EIEUs have been regulated financial products under the Corporations Act since 2015 (but voluntary emissions are not regulated financial products). SMCs are a type of EIEU which have been regulated since April 2023 under the safeguard mechanism reforms.
Entities responsible for large industrial facilities to whom the safeguard mechanism applies (i.e. responsible emitters that meet certain legislative rules set out, primarily in the National Greenhouse and Energy Reporting (Safeguard Mechanism) Rule 2015 (Safeguard Rules)) can be issued with SMCs by the Clean Energy Regulator. These responsible emitters can trade SMCs between safeguard facilities or with other people.
Tip
Holding an AFS Licence may be required when:
Ref: ASIC Regulatory Guide 236: Do I need an AFS licence to participate in carbon markets? (RG 236) |
To provide financial services in relation to any of these emissions units, you may need to hold an AFS Licence or be authorised by someone who holds an AFS Licence authorising them to provide these financial services.
Broadly, financial services include giving general or personal advice and dealing in financial products. However, some exemptions do apply. For example, an AFS Licence is not required to provide advice on, or deal in, carbon abatement contracts. An AFS Licence is also not required if you are buying or selling any of these financial products for yourself (or on your own behalf), this activity known as ‘self dealing’ does not require an AFS Licence. However, the exception to this is if you are issuing the financial product. For example,a derivative or interest in a managed investment scheme.
There are a number of ways to structure an offering of ACCUs, EIEUs and related financial products. All carbon derivatives over any emissions unit (even of a voluntary carbon credit) are considered to be financial products and, accordingly, financial services related to those derivatives will also generally need the coverage of an AFS Licence.
Interests in a managed investment scheme involving any emissions units or carbon abatement activities are considered to be financial products.
These can result in different licensing treatments, so seeking advice is essential to understand whether you need an AFS Licence to participate in carbon markets or to provide financial services in relation to carbon financial services.
The updated RG 236 provides further helpful examples of what constitutes financial product advice and dealing in carbon financial products. We have extracted some of these in the two tables below.
Examples of Financial Product Advice
Financial Product Advice | Not Financial Product Advice |
Advice that is, or could reasonably be regarded as being, intended to influence a decision about SMCs and ACCUs (e.g. advice about whether to acquire emissions units now, or wait to acquire them at some future time). | Advice of a technical nature that does not influence a decision about acquiring or disposing of SMCs and ACCUs (e.g. advice about measuring emissions or technological improvements to reduce a safeguard facility’s covered emissions). |
Providing advice to a responsible emitter that includes a comparison of the costs of avoiding an excess emissions situation through operational changes and the costs of purchasing and surrendering SMCs and ACCUs to meet its baseline. This is because the advice is not limited to advice of a technical nature in regard to operational changes, but might be, or might reasonably be regarded as being, intended to influence a responsible emitter’s decision about whether or not to buy or sell SMCs and ACCUs. | Advice that primarily relates to operational changes and the only information provided on SMCs and ACCUs is factual (e.g. it only quotes the spot price of ACCUs), unless the factual information is presented in a manner that may reasonably be regarded as suggesting or implying a recommendation to buy, sell or hold SMCs or ACCUs. |
Advice that may be provided in the context of ACCU Scheme projects, including:
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Advice about options for technology or inputs that may be used in a project, or advice about the technical feasibility of implementing the physical characteristics of a project (e.g. advice on the technical feasibility of establishing a particular forestry project in Australia).
Advice about the implementation, construction and costs of a project (e.g. advice about site selection, site preparation, species selection, technology procurement, project design, costs and construction). Advice about the potential financial returns of a project that are not returns related to carbon abatement or ACCUs (e.g. advice about cost savings).
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Advice given to a landholder in the following circumstances where it influences their decision in relation to acquiring (or generating) ACCUs, which are financial products, e.g.:
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Advice about the ongoing operations of a project (e.g. advice about a maintenance or asset management plan for a project).
Advice about reporting a client’s greenhouse gas emissions, energy consumption and energy production under the NGER Act. |
Examples of Dealing in a Financial Product
Dealing in a Financial Product | Not Dealing in a Financial Product |
Examples of dealing on behalf of others that may occur in relation to ACCUs or EIEUs include:
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Activities that would otherwise be dealing in ACCUs or EIEUs, but are done by a person on their own behalf, are not considered to be dealing in a financial product. You may be dealing on your own behalf if you are:
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Who are your clients?
You will also need to consider who you will provide financial services to and whether the AFS Licence should cover retail or wholesale clients. A client will be retail unless they fit into one of the following wholesale client definitions:
- the price for the provision of a financial product or financial service to which it relates, equals or exceeds $500,000,or
- before the provision of the financial product or financial service, the person obtains a statement from an accountant that the person:
- has net assets of at least $2.5 million; or
- has a gross income for each of the last 2 financial years of at least $250,000
- the person is a professional investor e.g. AFS licensees, listed entities, banks, and other specified entities that have the expertise or access to professional advice to justify their being treated as a wholesale client
- the person is assessed as a sophisticated investor by the AFS Licensee.
As each AFS Licence is tailored to the licence authorisations the applicant needs, when applying for the AFS Licence you will need to tell ASIC in the application whether you will engage in financial services with retail and/or wholesale clients.
AFS Licence application preparation
AFS Licensees need to be able to demonstrate that they have the organisational competency needed for the financial services that they provide as well as documented business systems (i.e. policies and procedures) for all aspects of their business.
AFS Licence applicants also need to demonstrate to ASIC that they have sufficient financial resources to carry on the proposed business, have adequate risk management systems and more broadly meet the general obligations.
Additionally, ASIC considers whether they have no reason to believe that the AFS Licence applicant, or other key decision makers in the business, are not “fit and proper” to perform one or more of their functions (for more information – see our previous article Licensing essentials: Fit and proper persons).
ASIC has the power to check on this during the AFS Licence application process. The extent to which ASIC does check depends on its assessment of the risk associated with the AFS Licence applicant’s business having regard to its size, the complexity of the services it offers and the like.
Because ASIC can and does check, AFS Licence applicants need to prepare these business systems in advance.
Tip
If you already have a licence authorisation for advice and dealing in EIEUs then you can now also advise and deal in SMCs without needing a licence variation because SMCs are EIEUs. Remember! If you are only licensed for ACCUs and want to do SMCs, then you will need to vary your licence for EIEUs |
Competency challenges for carbon financial services
A key consideration when applying for an AFS Licence is showing ASIC that you have people in the business (known as your Responsible Managers) who have the knowledge and skills to oversee the significant day-to-day provision of financial services (i.e. the regulated emissions units). ASIC have prescriptive requirements for demonstrating organisational competence and relies heavily on Responsible Managers showing previous regulated experience. In the context of regulated emissions units, product knowledge might include a combination of relevant qualifications and training, and experience in ACCUs, SMCs, or in emissions or environmental products that are not financial products.
See our previous article Licensing essentials: Responsible managers for carbon financial services dedicated to Responsible Managers for carbon financial services.
The key components of Licence Applications
There are five parts to an AFS Licence Application:
- An online application – referred to as the ASIC FS01 Form.
- Core proofs – these include a Business Description, People Proofs for each Responsible Manager, an Organisational Competence Proof and Financial Statements and Financial Resources Procedures.
- 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.
- Complex product proofs – Only required for complex products such as derivatives, custodial and depository services and market making. 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.
These documents are all lodged together for ASIC to assess. As at the date of this article, an Application Fee ranging from $2,233 to $11,305 including GST is payable to ASIC depending on the AFS Licence application.
Tip
ASIC have published service standards to assessing Licence applications. Prepare your AFS Licence variation well in advance. There are no short cuts to ASIC assessing Licence applications any quicker. 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. |
ASIC Licence application assessment
Upon receiving the application, ASIC assesses:
- the risk associated with the business
- the complexity of the proposed services and products
- the market in which the licence applicant proposes to operate.
Depending on the outcome of this assessment, ASIC may ask for some further information or documentation.
The key things ASIC looks for are whether:
- the nominated Responsible Managers have the qualifications and experience to support the relevant authorisations. The success of the application is often dependent on whether the nominated Responsible Manager satisfies ASIC’s criteria
- the people involved in managing and controlling the business are fit and proper
- the applicant has the appropriate business systems in place to manage the provision of those services.
Once ASIC is satisfied with these matters, it issues a draft licence. This needs to be carefully checked to ensure that the necessary authorisations have been provided and that no inappropriate conditions have been imposed.
The last step before ASIC grants the licence is to provide the final requirements which will depend on the type of licence that you are applying for and can include providing details about professional indemnity insurance and membership with AFCA if your licence covers retail clients.
How do I prepare?
Seek advice about whether you need an AFS Licence for the products/services you are proposing to provide relating to ACCUs, SMCs and EIEUs.
Alternatively, if your business model allows, you can operate as an authorised representative of an AFS Licensee that has the right authorisations so that you can gain the relevant experience to then apply for your own AFS Licence.
Overall, applying for an AFS Licence relating to carbon financial services can be more involved and it is important to be well prepared. Be aware of what is required before seeking an AFS Licence and engage the correct support network to present ASIC with a strong AFS Licence application.
How we can help
Hamilton Locke provides expert legal advice in the area of carbon financial services. Some of the ways we can help are:
- Advice on whether you need an AFS Licence for the products/services you are proposing to provide relating to ACCUs, SMCs and EIEUs
- Our suite of compliance tools and templates to help you build your compliance business systems. This is available via our eStore
- Responsible Manager Masterclasses. We run these as public courses throughout the year or we can be engaged to run a private in-house session
- Responsible Manager assessments to advise whether they will satisfy ASIC’s requirements to support an AFS Licence application or variation.
For more information, please contact Sónia Cruz, Erik Setio or Jaime Lumsden.