Understanding Big Brother ASIC: Exemptions from holding an AFS licence
Control of the present
Organisations are facing continual changes to their regulatory requirements. So, understanding the change is essential to avoid costly fines, reputational damage, or even a loss of the right to operate.
If you’re reading this article, you might be interested in whether you need to hold an Australian Financial Services Licence (AFSL) or if there is an exemption that applies to you. AFSL holders are required to meet a myriad of obligations set out in the Corporations Act 2001 (Cth) (the Act).
Admittedly, this topic does lend itself to one of the more complex areas of Corporation Law. Especially now, with the Australian Securities and Investment Commission (ASIC) increasing its focus on unlicenced entities and entities that fail to meet their AFSL obligations.
The Act imposes significant penalties for carrying on a financial services business without the appropriate AFS licence as below.
Criminal offences under section 911A of the Act:
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- for individuals, the penalties can be a maximum of five years imprisonment and/or a fine of up to 600 penalty units ($133,200.00); or
- for corporations, the penalties are up to 6,000 penalty units ($1.33 million).
Civil penalties for a contravention of 911A of the Act:
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- up to the greater of 5,000 penalty units ($1.11 million), or three times the benefit obtained, and detriment avoided for an individual; or
- greater of 50,000 penalty units ($11.1 million), three times the benefit obtained, or detriment avoided, or 10% annual turnover (capped at 2.5 million penalty units) for a body corporate.
It is imperative that people make sure they get it right.
Ignorance is not strength
Generally, any organisation that ‘provides a financial service’ is required by law[1] to hold an AFS licence, unless an exemption applies. The AFS licence is issued and regulated by ASIC, with licensees subject to a range of obligations concerning capital adequacy, organisational competence, reporting, and holding client assets.[2]
A ‘financial service’ encompasses the provision of financial product advice and dealing in a financial product.[3] Financial product advice is a recommendation, or statement of opinion, or a report of either of those things that is intended to influence a person in making a decision to acquire a financial product.
Relevantly, there is a distinction between ‘dealing’ and ‘arranging’ as well as a distinction between offering services to retail customers as opposed to offering services to sophisticated or institutional customers (wholesale).
Consider the AFS licence requirements as a large matrix of options with subsets of other options. One must consider what activities they wish to engage in, regarding financial products or financial services. Licensees must match prospective client activities with the AFS licence matrix to ensure the client ends up with the ‘authorities’ that permit them to undertake their business activities.
Ongoing compliance requirements must also be considered. This may involve a range of ongoing initiatives such as training, corporate governance, mandatory reporting, conflict resolution, etc.
Truth and untruth
The ease in which dealings fall within the threshold of requiring an AFSL may be surprising to some. For example, the sale of units of a unit trust to multiple individuals with the aim of pooling money for investment constitutes a financial product; it is irrelevant whether the trust is a registered managed investment scheme. If a person recommends a financial product i.e., the unit in that pooled investment trust, they are said to be providing a financial service[4] of the Act. If a person deals in a financial product, then they are also providing a financial service. Therefore, the trustee of the unit trust is deemed to be dealing when issuing the units, and anyone arranging for the trustee to issue a unit is also dealing.
Conclusion
Holding an AFSL issued by ASIC gives the holder the authority to provide a financial service to clients in Australia. The AFSL is a legal licence that governs the procedures and processes of financial and investment organisations in Australia. Depending on the circumstances, some exemptions allow businesses to operate without holding an AFSL.
We have spent hours in the legislation and organised a table of the current exemptions to holding an AFSL in Annexure 1 below.
For further information or legal advice regarding AFSL and the exceptions to holding an AFSL, please contact us.
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Authored by:
Liam Hennessey, Partner
Munkh-Erdene Saruul, Paralegal
Annexure 1: Table of AFSL exemptions
| Exemptions | Sub-categories | Brief description of the exemption |
|---|---|---|
| Section 911B | An employee of an authorised representative of the principle, but only if the principle holds an AFS licence. | |
| Foreign Financial Services Providers | No inducement for people in Australia to use the service. | A person or company located outside of Australia provides a financial service from outside Australia to a client in Australia and does not induce people in Australia to their service. |
| Foreign Financial Services Providers | Trading on a licensed Australian Financial Market for overseas client. | A person or company located outside of Australia trades on a licensed Australian financial market for a client and the foreign person or company believes on reasonable grounds that the client is an overseas client. |
| Foreign Financial Services Providers | Providing financial service to an Australian Client in relation to a financial product it issued when Australian client was overseas. | A person or company located outside of Australia provides a financial service to a client in Australia relating to a financial product that are; issued to the Australian client upon the client's instigation or issued to the Australian client while the client wasn’t in Australia. |
| Foreign Financial Services Providers | Providing financial services to professional investor. | A person or a company located outside Australia provides a financial service to a client in Australia relating to a financial product that are; issued to the client per their instigation or when the client wasn’t in Australia. |
| Foreign Financial Services Providers | Acting in conjunction with an AFS licensee in Australia. | If the AFS licensee arranges for a person or company located outside Australia to deal for a client who is in Australia. |
| Foreign Financial Services Providers | Dealing with an AFS licensee. | A person or company located outside Australia provides a financial service to another person or company who holds an AFSL or is exempt from the requirement to hold an AFSL under s 911A(2)(h) and is not, in relation to the service, acting as a trustee, responsible entity of a registered managed investment scheme or otherwise acting on someone else's behalf. |
| Foreign Financial Services Providers | Referral to an AFS licensee. | A person or company located outside Australia provides a financial service that consist only of a referral that is, informing another person that an AFS licensee (or one of its representatives) is able to provide a particular financial service or class of financial services and giving that other person contact details for the AFS licensee or representative. |
| Foreign Financial Services Providers | Dealing in off-market products to foreign clients. | A person or company located outside Australia is only dealing in products not traded on an Australian Financial market license. |
| Foreign Financial Services Providers | Regulated by an overseas regulatory authority. | A person or a company located outside Australia provides the service only to wholesale clients and is regulated by their regulatory authority and the provision of the service is covered by an exemption specified by ASIC. |
| Foreign Financial Services Providers | Foreign authorised deposit-taking institutions. | A foreign authorised deposit-taking institution engages in limited dealings with derivatives and foreign exchange that are related to ordinary banking business and the counterparty to the dealing is a wholesale client. |
| Foreign Financial Services Providers | Dealings with a limited connection to Australia. | A person or company that is located outside of Australia deals with wholesale clients and the only reason that the foreign person or company is carrying on a financial services business in Australia is as a result of s 911D. |
| Financial Counselling Agencies (FCA) | Financial Counselling Agencies is an agency that provides free and independent financial counselling and advice to assist those in financial difficulty. The ASIC Corporations Financial Counselling Agencies Instrument 2017/792 offers financial counselling agencies with an exemption to holding an AFSL. | |
| Foreign Collective Investment Schemes (FCIS) | ASIC can grant discretionary relief to FCIS, who operates under authorisation in other jurisdictions. This exemption enables FCIS to operate in Australia without being subject to all the regulatory requirements. | |
| Businesses carried out in connection with an AFS licensee | Organisation acts as a representative of an AFS licensee. | A person or company provides the service as a representative of a person who is licensed to carry on the financial services business that covers the provision of the service. |
| Businesses carried out in connection with an AFS licensee | Organisation is acting under an intermediary authorisation. | A person or company enter or provide a service under an intermediary authorisation. |
| Businesses carried out in connection with an AFS licensee | Incidental to the operation of a licensed market or licensed CS facility. | A person or company provides the services of, or the service is provided incidentally to, the operation of a licensed market or licensed CS facility. |
| Businesses carried out in connection with an AFS licensee | Organisation acting in an administrative capacity. | A person or company provides the financial service in one of the circumstances described in s 911A(2)(f). |
| Businesses carried out in connection with an AFS licensee | Sub-custodian. | A person or company provides the service as a sub-custodian in the circumstances set out in reg 7.6.01(1)(k). |
| Businesses carried out in connection with an AFS licensee | General product advice provided to an AFS Licensee by the issuer. | A person or company that issued a financial product or class of financial product provides general product advice to an AFS licensee about those products and the AFS licensee is authorised to provide that advice. |
| Businesses carried out in connection with an AFS licensee | Activity of a nominee. | A wholly owned subsidiary of a licensed market person or company holds a financial product or the beneficial interest in a financial product on trust for a client of the licensed market participant in the circumstances set out in reg 7.6.01(1)(v). |
| Businesses carried out in connection with an AFS licensee | General insurance distributor. | A distributor of an AFS licensee authorised to deal in general insurance products provides the financial service of dealing in a general insurance product. |
| When the financial services business is not the only or focus of the activity | General advice. | A person or company provides general advice by publishing a newspaper or periodical that is generally available to the public and where the sole or principal purpose of the newspaper or periodical is not the provision of financial product advice. |
| When the financial services business is not the only or focus of the activity | Actuaries. | A person or company is an actuary providing a financial product advice in the circumstance set out in reg 7.6.01(1)(oa). |
| When the financial services business is not the only or focus of the activity | Non-cash payment facility (general). | A person or company provides financial services in relation to low value non-cash payment facilities where specified consumer protection requirements are met. |
| When the financial services business is not the only or focus of the activity | Non-cash payment facilities (others). | A person or company provides advice in a document issued in connection with a takeover bid or an offer of a financial product and the advice relates to matters other than financial products in the circumstance that are set out in reg 7.6.01(1)(u). |
| When the financial services business is not the only or focus of the activity | Advice relating to matters other than financial products. | An issuer of certain documents provides general advice contained in those documents. |
| When the financial services business is not the only or focus of the activity | General advice contained in a document. | A person who is a member of an eligible external dispute resolution scheme provides financial services that consist of advising or arranging in relation to a mortgage offset account. |
| When the financial services business is not the only or focus of the activity | Mortgage offset accounts. | A person who is a member of an eligible external dispute resolution scheme provides financial services that consist of advising or arranging in relation to a mortgage offset account. |
| When the financial services business is not the only or focus of the activity | Financial counselling. | A financial counselling agency provides financial product advice in the course of providing a financial counselling service. |
| When the financial services business is not the only or focus of the activity | Generic financial calculators. | A person or company provides generic financial calculators. |
| When the financial services business is not the only or focus of the activity | Valuing shares in a real estate company. | A person or company provides financial product advice that is, or is incidental to, a valuation of shares in a real estate company. |
| Financial services that only involve the financial service provider | Services provided to a related body corporate. | A person or company provides the service that only relates to body corporate. |
| Financial services that only involve the financial service provider | Variation or disposal of financial product by issuer. | A person or company is a product issuer who varies or disposes of a financial product at the direct request of the product holder rather than through an intermediary. |
| Financial services that only involve the financial service provider | Dealing in derivatives or foreign exchange contracts to manage financial risk. | A person or a company deals on its own behalf in derivatives or foreign exchange contract. For the purposes of managing a financial risk that arises in the ordinary course of a business. This is only if the person or company does not deal in derivatives or foreign exchanging contracts as a significant part of its business. |
| Financial services that only involve the financial service provider | Employee share scheme. | A person or company is giving general advice in connection with an eligible employee share scheme, and it is the issuer of the financial products covered by the scheme or an entity controlled by the issuer. |
| Financial services that only involve the financial service provider | Issuer varies or disposes of the financial product. | A person or company that issued a financial product varies or dispose of that financial product under the terms of the financial product. |
| Financial services that only involve the financial service provider | Trustees of a public offer entity. | The trustees of a public offer entity deal in financial products on behalf of the members of that entity in the course of operation of that entity. |
| Financial services that only involve the financial service provider | Self-dealers. | The bodies that are entitled to the licensing exemption under s 766C(4) provide general advice to wholesale clients in an offer document about securities covered under the same section. |
| When the financial service is under the authority of an alternative regulatory regime | If the organisation is regulated by the Australian Prudential Regulatory Authority (APRA). | A company provides the financial service only to wholesale clients and is a body regulated by APRA and the service is one of which APRA has regulatory or supervisory responsibilities. |
| When the financial service is under the authority of an alternative regulatory regime | If the organisation acts in trustee capacity in relation to superannuation. | A body deals in a financial product in the capacity of trustee of a non-public offer superannuation entity. |
| When the financial service is under the authority of an alternative regulatory regime | Superannuation. | A body is an employer-sponsor dealing in a financial product only by paying contributions on behalf of an employee into a superannuation product or RSA product. |
| When the financial service is under the authority of an alternative regulatory regime | Workers' compensation insurance. | A body provides a financial service relating to insurance with respect to workers' compensation for the following circumstances. |
| When the financial service is under the authority of an alternative regulatory regime | Factoring arrangements | A person or company purchases debt obligations under the terms of a factoring arrangement. The relief is conditional on the disclosure of terms and conditions to retail clients and maintenance of an internal dispute resolution system that covers retail client complaints. |
| When the financial service is under the authority of an alternative regulatory regime | Acting as a trustee of wholesale equity venture capital schemes. | Acting as a trustee of wholesale equity venture capital schemes. |
[1] Corporations Act 2001 (Cth) Chapter 7.
[2] Ibid, Section 912A(1).
[3] Ibid, Section 761A.
[4] Ibid, Section 766B(1).
