Liability of a Responsible Manager – Who’s responsible when things go wrong?

The Responsible Manager (RM) of a licensee plays a key role under the financial services and credit licensing regimes.

However, many RMs are concerned as to their responsibilities and liabilities when things go wrong.  This article looks into the role, responsibilities and ultimate liability of an RM.

Who is a responsible manager?

A Responsible Manager is the person nominated within a business to demonstrate the licensee has the competence to provide the licensed financial services or credit activities.  The number of RMs required will vary with the size and complexity of the licensee’s business – a small financial advisory practice might only need one RM, while a large bank might need dozens.

The role of the RM has been created by ASIC and is, therefore, not defined in legislation.  Instead, the RM must fulfil the skill and knowledge requirements outlined by ASIC in RG 105 for Australian Financial Services Licensees (AFSLs) or RG 206 for Australian Credit Licensees (ACLs).

These skills and knowledge requirements basically fall into 2 broad areas – product and regulatory:

• Product knowledge is usually easiest to show – the senior operational line managers within the business would normally fill these RM roles as they will have the requisite experience together with the day-to-day oversight of business operations.
• Regulatory knowledge is more difficult to show as it requires an RM that has experience with operating within a regulated environment. This means an understanding of the licensing, disclosure, conduct, reporting and regulatory capital requirements applicable to the business.  An example of this type of RM would be a licensee’s compliance manager.

What is the role of a responsible manager?

RMs have to meet the following requirements:

• having direct responsibility for significant day-to-day decisions about the ongoing provision of financial services;
• in conjunction with the other RMs, collectively having appropriate knowledge and skills for all of the licensee’s financial services and products;
• being “fit and proper”;
• individually, meeting one of the options specified by ASIC for demonstrating appropriate knowledge and skills.

The RM essentially brings their knowledge and experience to bear in the conduct and oversight of the day-to-day operations of the business.  For example, in a financial planning business, an obvious RM would be one of the senior financial advisers.  For a managed investment fund, it would make sense to have a senior investment manager as an RM.  As noted above, a compliance manager is an obvious candidate to be an RM.

However, a licensee cannot place total reliance on the RMs to ensure that compliance with licensing obligations are dealt with.  The Directors of the licensee have the ultimate responsibility to identify what the key licence requirements are and understand what measures are in place to ensure the compliance framework is functioning effectively.  They will usually establish a formal compliance system to monitor this.

ASIC expects that the licensee will “maintain and update the knowledge and skills of its responsible managers”.  Each RM should, therefore, have a professional development plan setting out how they are going to maintain their knowledge and skills.  These plans might include:

• attendance at industry association events;
• reading industry association publications;
• if the RM provides personal advice to retail clients in relevant financial products, meeting the FASEA education and ongoing CPD standards.

If ASIC believes that the licensee is heavily reliant on one or a few RMs for its organisational competence, it will impose a Key Person Condition on the licence.  Such a condition expressly names the RM on the licence and the licence needs to be varied by ASIC before that person can cease to be an RM.

Appointing and removing responsible managers

Generally, a licensee will have notified ASIC of its proposed RMs at the time it first applied for its licence.  It will also notify ASIC of the appointment of new RMs if it applies to vary its licence to add additional authorisations.  For each type of application, ASIC will only grant the licence or variation if it is satisfied that the proposed RMs collectively demonstrate organisational competence in relation to all the services and products under the licence.

At other times, if the licensee wishes to appoint further RMs, it makes the appointment and must then notify ASIC within 10 business days of that appointment.  The same applies if the licensee is terminating a person’s appointment as RM – although stricter rules apply if the RM is a Key Person.

What happens when problems arise?

It is a commonly held belief that when a company with an AFSL or ACL gets into regulatory trouble, it is the RM that is in the firing line with ASIC.  However, this is not so – it is the licensee which has to meet the conduct obligations under the Corporations Act and is subject to the enforcement consequences.

That said, where there are problems with a licensee, the first point of contact for ASIC will often be the RM as they are expected to have knowledge of the licensee’s internal operations.

The RM will be expected to be able to provide information to ASIC, explain what the problems are, how they came about and how they will be fixed.  Should ASIC not receive satisfactory responses to these initial enquiries then they would be more inclined to undertake a more rigorous examination of the licensee’s business activities.

What are the consequences for the RM?

Appointment as RM does not attract any particular personal liability in itself.  This is because the concept is not a legal concept.  It is a tool that ASIC has created in its guidance to explain how it believes a licensee can demonstrate that it has the organisational competence to provide the financial or credit services.

However, the fact that you have been appointed as an RM raises several other likely possibilities about your role that you may be exposed to:

• One is the higher likelihood that any contravention of the law by the licensee could be seen as having your involvement. This risks you receiving a banning order (see below).  This is more likely in smaller licensees where there are only one or two RMs.
• Another is that, to have the requisite level of involvement in the business to be appointed an RM, you may meet the definition of “officer” under the Corporations Act. An officer has various duties under the Act, including the duty “to act in good faith in the best interests of the corporation”.  If you make decisions that result in the licensee contravening the law, exposing it to the risk of the loss of its licence, you might be considered not to have acted in the best interests of the company.

If the RM is not a Director or officer of the licensee, the RM’s liability to the company is usually determined by their employment or consultancy contract.  So, while those RMs do not share the same level of exposure or liability as Directors and officers, a poor performing RM may also be found to have failed to meet their contractual obligations.

Further, if a licensee enters administration, the RM may be one of the first staff to be let go as the administrators take over the operations of the company.  The administrators will often do so without having any RM in place during this period.

Finally, simply being involved in a contravention of the law by the licensee may impact your suitability to act as an RM in the future.  ASIC may consider that, because you were part of an environment in which there were frequent breaches, you are not suitable to be an RM and will not accept your appointment in that role in the future.

Can I be banned from being an RM?

ASIC can ban any person if it has reason to believe they are not a “fit and proper” person to provide the financial services or perform one or more functions as an officer of the business or control an entity that carries on a financial services business.

The power is very wide and ASIC could use it to ban a person from being an RM.

ASIC considers that the phrase means that a person is:

• competent to undertake their role,
• has good character, diligence, honesty, integrity and judgement,
• is not disqualified by law from performing their role, and
• has no conflicts of interest that would create a material risk that they would fail to properly perform their role.

What now?

As a responsible manager, it is important that you understand your role and that you ensure the licensee you are responsible for is meeting its regulatory obligations.  If you’re looking for ongoing compliance support and training on what it means to be a responsible manager, Holley Nethercote Compliance offers introductory and advanced responsible manager training for responsible managers of all different expertise and skill sets.

Author: David Court (Partner)