Current ASIC trends in AFSL and ACL applications and variations

Some of you reading may already hold a licence issued by ASIC, be it an AFSL, an ACL or both. If you’re not looking to set up a new business or expand your current business activities, you may wonder why you should care about changes in the licensing process.

We find that the approach taken to licence applications, often reflects changes in ASIC’s wider approach to certain industries. For example, the extra scrutiny applied to licence applications in the retail OTC derivatives space (e.g. CFDs and margin forex) began waaay back as a reaction to the collapse of GTL TradeUp, but has increasingly escalated in parallel with ASIC’s regular Reports.

Additionally, if you want to vary your licence, or (in some cases) change your responsible managers, you will have to deal with the licensing team. Accordingly, it is important to know how the process has changed since you last dealt with ASIC. For those of you that streamlined into the AFSL or ACL regimes, the changes are significant!

Timeframes

The first question usually asked by clients seeking to apply for or vary a licence is “how long will it take?” The answer will vary depending on the complexity of the application. The bad news is that timeframes for applications are increasing significantly across the board. ASIC has changed its service charter from aiming to make a decision on 70% of licence applications (either for new licences or variations) within 60 days to 150 days, and 90% within 240 days. Yes, it is taking double the time it previously took to obtain a licence.

If you need to vary your licence to add a complicated new product (for example, you wish to commence operating registered managed investment schemes), we suggest allowing at least 9-12 months for the application process. Many applicants forget that it can be a process of several months just to get the application in a state to lodge, let alone the time required by ASIC to assess the application.

In our experience, part of the reason for the extended timeframes is due to ASIC’s broader scrutiny of the applicant and applicant’s proposed business. However, the rise of innovative businesses (think fintech, regtech, agritech or other-tech) means that the applications being considered by the licensing analysts are more complex than 5 years ago, so many applications are taking much longer than previously due to ASIC raising more detailed requisitions and also requesting a broader range of non-core proofs. Another part of the reason is a smaller team. ASIC’s team has more than halved since our Head of Licensing, Frank Varga, oversaw it.

Additional disclosure

Since December 2018, ASIC has required additional information be provided in relation to the responsible officers of a corporate AFSL applicant. Applicants must disclose the names of all directors, secretaries and other responsible officers (as defined in the Corporations Act 2001) involved in the company. Bankruptcy and National Criminal History Checks must also be provided for each responsible officer and a declaration must be provided on behalf of the company as to the good fame and character of the responsible officers.

In July 2019, ASIC released Info Sheet 240 setting out additional information (“non-core proofs”) that must be provided as part of an ASFL application in addition to the Responsible Officer disclosure referred to above. The non-core proofs that must be provided to ASIC varies, depending upon the authorisations sought. The type of information required to be provided in the non-core proofs include details of compliance arrangements, risk management statements, programs for monitoring, supervision and training of representatives and arrangements for monitoring conflicts of interest, amongst others.

ASIC has always had the ability to seek this information from applicants, and has regularly requested these non-core proofs during the application process. The difference is that now the non-core proofs are required to be provided at the time of lodging an AFSL application.

Wider scope of review

If you are looking to vary your licence, be aware that ASIC is unlikely to restrict its assessment purely to the proposed changes to your licence, especially if your licence has remained unchanged for some time. We have had several situations where ASIC has used a variation application as an opportunity to conduct a broader review of the licensee’s activities. Such a review could mean ASIC asking further questions about your responsible managers or delving into the details in your business model. If your current responsible managers have not previously been thoroughly assessed by ASIC you should expect that ASIC will conduct an assessment of your responsible managers during an application. We recommend lodging the relevant ASIC proofs for your responsible managers at the time of lodging the variation application to streamline the process.

We have previously noticed this in industries that ASIC considers high risk, such as MDA providers and OTC derivatives businesses. However, more recently we have noticed a wider scope of review where ASIC has some intelligence in relation to a responsible manager. For example, having been named in a complaint or part of an investigation or surveillance conducted on a former licensee. If an applicant or proposed responsible manager was previously a representative of a licensee that ASIC has taken regulatory action against, you should expect that ASIC may make additional inquiries during the license application process.

We note that on a number of occasions we have been informed by analysts within the licensing team that licence applications are placed on hold pending input from ASIC’s relevant stakeholder team. Do not be surprised if a licensing analyst asks questions about a historical matter.

Financial inquiries

When you apply for an AFSL you must submit a balance sheet and profit & loss statement. Increasingly, ASIC is undertaking a closer analysis of an applicant’s ability to meet the base level financial requirements prescribed in ASIC Regulatory Guide 166 Licensing: Financial requirements. This is particularly the case if you intend to satisfy the solvency and positive net assets requirement by relying on an alternative test involving adjusted assets and liabilities.

Similarly, we have assisted clients with ASIC inquiries about particular items in balance sheets such as high goodwill values and the nature of capital contributions. These inquiries have not been limited to applications involving complex or high-risk products – there is no such thing as a ‘simple’ application any more.

Wider reviews or consultations can lead ASIC to better understand your business, but they are also likely to increase the time taken for ASIC to make a decision on your application.

Competence of ACL responsible managers

If you applied for your ACL during or just after the transition period, you may remember that ASIC’s benchmark for competence was “two years of relevant, problem-free experience” as outlined in RG 206. While the language in the guidance has not changed, we have noticed significant differences in how ASIC is interpreting the concept of “relevant experience”.

Previously, it was unusual for an analyst to question the experience of a potential responsible manager unless it was clear that there was no relevant credit experience, or the experience was not ‘problem-free’ (such as being disciplined by a professional body).

In more recent times, we have noticed analysts asking many more questions about experience. Currently, we do not recommend nominating a responsible manager unless they have at least two years of experience working under another ACL in the same type of business. In addition, the responsible manager should have experience in the day to day credit services provided as well as supervisory and compliance experience. This is particularly so for credit provider applications.

Complying with international laws

Many businesses that hold an AFSL do not just operate in Australia, but may service clients across the globe. This model is especially prevalent in models based online, such as online derivatives or corporate FX remitters. Following recent actions by ASIC in relation to retail OTC providers, we are seeing increased instances where ASIC will ask an application or licensee to show how they are legally operating in all overseas jurisdictions where the business has clients. This extends to providing an explanation about the legalities of servicing clients in overseas jurisdictions.

ASIC’s view is that a licensee cannot be providing their services efficiently, honestly or fairly if they are operating in an unlicensed or illegal fashion overseas. Therefore, we expect such enquiries to become more common, and we recommend all licensees ensure that they can answer such queries when they arise.

Focus on certain business lines

As we alluded to earlier, over the past couple of years ASIC has classified certain types of businesses as higher risk, attracting a higher level of scrutiny of their applications. For AFSLs, such businesses include MDA operators and MDA advisers, money remitters, OTC derivatives market makers (e.g. CFDs brokers) and robo-advice. For ACLs, all types of non ADI lenders are highly scrutinised, especially those that intend to operate under both regimes (e.g. lending consumer credit from a managed fund).

If your business falls within these categories, even if you are only varying your licence, you should expect a lengthy application process as the analyst is likely to request a lot of information about your business model. If you have any prior instances of non-compliance, expect these instances to be investigated.

Other matters

The first round of ASIC levy invoices were received by licensees in 2018. The cost of which lead some licensees to question the need for more ‘expensive’ authorisations on their licenses. We dealt with a number of inquiries about varying licences to remove unused or rarely used authorisations given the cost to the business in holding them. We suspect ASIC also experienced a spike in variation applications and even cancellation requests as a result.

ASIC has publicly announced its shift in approach to regulation post Royal Commission. Around the same time, ASIC has doubled the time it takes to assess licensing applications under its service charter. We are seeing more scrutiny being undertaken throughout the Australian Financial Services and Australian Credit licensing application process across a broader range of applications.

Author: Frank Varga (Head of Licensing) and Fiona McCord (previously Senior Associate at Holley Nethercote)