Operating a wholesale fund in Australia comes with important regulatory obligations, and one of the most crucial is ensuring you have the appropriate Australian Financial Services Licence (AFSL). Our experts break down the essentials for AFSL applications.
It’s no secret that if you want to operate your own wholesale fund, you need to be licensed to provide financial services (unless you can rely upon an available exemption). What’s less understood is that you also need to have the right authorisations in your AFS Licence, which can vary depending on your intended investment activities. Getting this right the first time will save significant time, cost and compliance risk down the line. Below are the key things you need to consider when applying for an AFS Licence to manage and operate a managed investment scheme for wholesale clients (in circumstances where you cannot rely upon an exemption).
Establish the fund’s structure
When you’re determining which types of AFS Licence authorisations you’ll need, it’s important to consider how your fund will be structured and what roles you’ll be performing. . Typically, there are two key functions:
| Trustee | A trust is where a ‘person’ (that is, a legal person including a corporation) acts as the trustee of the trust, and in their capacity as trustee, deals with the trust property in the interests of the beneficiaries.
The trustee will either manage the trust investments or engage an investment/fund manager. The trustee is ultimately responsible for the operation of the scheme because the trustee is the entity that issues the units in the managed investment scheme and owes the fiduciary obligations to the beneficiaries/unitholders. In all circumstances, the trustee must act in the interests of the fund beneficiaries/unitholders. As such, most trustees require the final say over investment decisions of the fund, as they are ultimately on the hook if things go south. Where the trustee engages an investment manager, the trustee will act on the advice (or direction) of the investment manager to make or dispose of investments for the fund in accordance with an investment mandate. In some circumstances the trustee may even delegate some authority to the investment manager to enter into certain investments as agent of the trustee, but this will depend on the nature of the relationship between the trustee and investment manager. |
| Investment/fund manager
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The investment/fund manager function can be provided by the trustee or a separate entity. The investment manager typically designs and develops the investment mandate and advises the trustee on what investments should be acquired and sold based on the investment mandate.
The investment manager will need to hold their own AFS Licence or be appointed as an authorised representative of an AFSL holder, to provide advice to the trustee on any financial products held by the trustee in the trust. In circumstances where the investment manager also promotes the fund to investors, the investment manager will also need to be authorised to provide financial product advice on interests in managed investment schemes. Generally, the investment manager must also be authorised to arrange the issue of interests in the managed investment scheme to investors, and to arrange for the trustee to apply for, acquire, vary, or dispose of the fund’s underlying assets. |
Depending on your capabilities and operations, you can operate as the trustee, investment manager or both. This needs to be decided before applying for an AFS Licence, as the functions you will provide will affect what licence authorisations you need. For example, if you intend to be the trustee, then you generally must be the licensee.
Some fund managers prefer to retain control over the investment decisions of the fund and choose to act as the trustee themselves. Others may prefer to have a trustee entity who holds all the fiduciary duties and which acts as a compliance overlay of the fund. These fund managers may choose to engage an ‘outsourced trustee’, which is a service provider entity that acts as trustee of the fund. Outsourced trustees can provide compliance guidance and support for funds – in particular for first time fund managers.
Confirm the type of assets to include in the fund
Where the investments held in the fund include financial products (such as securities, derivatives or foreign exchange contracts), the trustee and/or investment manager must also be licensed/authorised to provide certain financial services in relation to the underlying assets of the fund.
Where financial products are held in the fund, the trustee must also be authorised to provide a custodial and depository service for holding financial products on behalf of the unitholders. This is required even if the trustee outsources custody to a professional custodian.
Apply for an Australian Financial Services Licence
The Australian Securities and Investments Commission (ASIC) processes all AFS Licences, and they 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 Responsible Managers, so you need to choose your Responsible Managers carefully.
The key to a successful licence application is knowing who will perform the functions of the Responsible Managers. For example, we often see clients that have extensive experience managing investment portfolios and dealing with fund assets, however, have little experience in the trustee functions involved in issuing the interests in the schemes to investors or the custody of assets.
Where you will hold a licence to operate as the trustee, you must have at least one Responsible Manager with experience operating a fund or at the very least performing tasks that demonstrate experience issuing, acquiring, varying or disposing of interests in managed investment schemes.
If you don’t have this capability inhouse, you can engage a contractor Responsible Manager who does have this competency, or consider relying on an external trustee and only applying for the licence to operate as the investment manager.
Although ASIC technically does not have oversight of organisational competency to deal in underlying assets that are not financial products, in our experience, ASIC still requires the applicant to demonstrate experience in dealing in underlying assets that are not financial products (such as real property).
Licence applicants are assessed on their ability to comply with the financial services laws, and how they meet the general obligations associated with these licences.
Aside from organisational competency, AFS Licensees also need to demonstrate that they have:
- documented business systems, i.e. policies and procedures, for all aspects of their business
- sufficient financial resources to carry on the proposed business
- adequate risk management systems.
Fill out the online application form
To apply for an AFS Licence, you will need to complete an online application. The online application will automatically pre-fill the applicant’s related details already known to ASIC, for example details on the company register about directors.
The application form will contain a series of questions relevant to the type of licence which you are applying for, for example you will need to consider arrangements for managing representatives, training, resource adequacy, product research, dispute resolution, compliance and risk management. You will also need to provide information about the proposed business and its operation.
Information will also be required about the licence applicant’s ‘officers’ and the ‘officers’ of its controller. You are required to demonstrate they are fit and proper. See our recent article on this topic.
An application fee ranging from $2,233 to $11,305 including GST is payable to ASIC at the time the application is lodged.
What ASIC will be looking for
ASIC takes the time to review and assess each application. Generally, ASIC will come back with any further questions before making a decision to grant a licence.
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.
How we can help
Hamilton Locke provides expert legal advice in the funds management sector. Here’s how 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.
- Advise on how to structure the fund, establish the fund and prepare disclosure and supporting documents.
- Provide assistance with the AFS Licence application, liaise with ASIC and provide technical and legal advice throughout the process.
- A suite of compliance tools and templates to help you build your compliance business systems. Available via our eStore.
- Responsible Manager Masterclasses. We run these as public courses throughout the year or we can run a private in-house session.
- Our colleagues at Source can provide ongoing compliance support.
For more information, please contact Erik Setio, Sónia Cruz or Annabelle Parmegiani.
