Licensing 101: The Fit and Proper requirement

When applying for an AFSL, applicants must be prepared to meet the fit and proper requirement – a test that assesses competence, financial soundness, legal compliance and moral character.  ASIC will not grant the licence (or licence variation) unless it is satisfied that certain people in the applicant’s business are fit and proper to engage in financial services.[1]

Further, due to ASIC’s expanded licence suspension and cancellation powers, continuing to meet the fit and proper person requirement is an important ongoing requirement for existing AFS licensees.

What is the fit and proper test?

When administering the fit and proper test, ASIC will have regard to:[2]

• whether the person has been convicted of an offence in the last 10 years;
• whether the person has had an AFSL or ACL that was suspended or cancelled;
• whether a banning order or disqualification order has previously been made against the person under the Corporations Act 2001 (Corporations Act) or the National Consumer Credit Protection Act 2009 (NCCP);
• whether the person has ever been linked to a refusal or failure to give effect to a determination made by AFCA;
• whether the person has ever been involved in an insolvency related event;
• whether the person has been disqualified from managing corporations;
• whether the person has been banned from engaging in a credit activity under a State or Territory law;
• any other relevant information given to ASIC by a State or Territory authority; and
• any other matter prescribed by the regulations or that ASIC considers relevant.

The broad number of factors to which ASIC must have regard prescribes a higher standard of competence and ethical standing than that previously prescribed by the ‘good fame and character test’.  ASIC is to have regard not only to a person’s criminal history and AFSL dealings, but also their financial record and history in providing credit and managing corporations generally.[3]

When does the fit and proper test apply?

Under the legislation, the fit and proper test applies to a person seeking to apply for an AFSL and persons already holding an AFSL.  Existing AFSL holders still need to ensure that they maintain compliance with the fit and proper requirement because:

• where they wish to apply for a variation to their existing AFSL, ASIC will refuse to grant the variation where the fit and proper requirement is not satisfied; and
• ASIC has the power to suspend or cancel an AFSL after offering a hearing where the fit and proper person requirement is not satisfied.[4]

Who is required to be fit and proper?

Where the applicant or AFSL holder is a body corporate, the requirement to be fit and proper extends to all officers of the body corporate (whether or not that officer performs duties in relation to the AFSL).  The term ‘officer’ is defined under legislation as not only including directors, but also any persons:

• involved in making decisions that affect the whole or a substantial part of the business;
• with the capacity to affect significantly the body corporate’s financial standing; and
• in accordance with whose instructions or wishes the directors of the body corporate are accustomed to act.[5]

In addition, any person who controls the applicant or AFSL holder must meet the fit and proper person requirement.[6] Control of a body corporate, or another entity, for the purposes of the AFS licensing regime, can be determined through a number of ways. These include:

• the ability to cast more than half the votes at a general meeting of the body corporate;
• holding (directly or indirectly) more than half the issued share capital;
• having the capacity to control the composition of the board; and
• having the capacity to determine the outcome of decisions about the body corporate’s financial and operating policies.

If the controller is a body corporate, the requirement equally extends to the officers of the controlling entity. [7]

For licensees that are partnerships or trusts, the fit and proper test extends to the partners, trustees and senior managers and if the entity is controlled by a partnership or trust, the test also extends to the partners, trustees and senior managers of that controlling entity.[8]

What about responsible managers?

In addition to the persons listed above, applicants will need to ensure that the responsible managers to be appointed under the licence (or licence variation) meet the fit and proper requirements.[9]  Although the appointment of responsible managers is not a requirement under the Corporations Act, ASIC requires that licensees appoint suitable responsible managers who can demonstrate the organisation’s competence and ability to provide the relevant financial services.  Applicants will therefore need to hire and/or nominate responsible managers who can fulfil the fit and proper requirements.

Satisfying the fit and proper test

In order to prove that there is no reason to believe that the relevant persons are not fit and proper, ASIC requires that certain documents, namely ‘people proofs’, be submitted at the time of lodging an application for a licence or licence variation.

All responsible managers, officers, controllers and officers of controlling entities (if relevant) must submit:

• their full name, position description and residential address;
• a statement of personal information which contains a declaration regarding, among other things, whether the person has ever been convicted of an offence, had a licence cancelled or been banned or disqualified under the Corporations Act or NCCP; and
• a criminal history check and a bankruptcy check, which must not be less than 12 months old.

The extension of the fit and proper requirement to controllers, and officers of controllers, can prove onerous for large corporate groups and particularly where controlling entities are foreign entities.  This is especially the case where the relevant foreign country does not maintain insolvency and bankruptcy registers for the officers of the controller.  As ASIC can request an entity to provide proof of compliance, this could put a licensee in a difficult position to be able to prove that there is no reason to believe that any controlling entities and its officers are not fit and proper.  However, note that alternative documentation may be accepted by ASIC in these cases.[10]

What happens if I fail the fit and proper test?

Where an applicant fails to meet the fit and proper test, ASIC will refuse to grant the licence or licence variation.  Where a single officer or responsible manager fails to meet the fit and proper requirement, ASIC will likely require the officer or responsible manager to resign before granting the licence.

For existing AFSL holders, ASIC has the power to suspend or cancel the licence where the fit and proper test is not satisfied, subject to a hearing being offered to the licensee.[11]  Further, ASIC can make a banning order against a person if ASIC has reason to believe that the person is not a fit and proper person to provide one or more financial services, perform one or more functions as an officer of the licensee entity or control the licensee entity.[12]  In certain circumstances, ASIC may make such a banning order without first offering the person the opportunity to appear at a hearing or make submissions to ASIC.[13]  A banning order can be made for a specified period of time or on a permanent basis.

Practical tips

Given ASIC’s banning, suspension and cancellation powers, the fit and proper requirement is an ongoing obligation for AFSL holders.  ASIC expects licensees to carry out periodic checks on their responsible managers (especially key persons named on the licence) and officers to ensure that they remain fit and proper.  Licensees should therefore schedule checks on at least an annual basis, including undertaking criminal history checks, bankruptcy checks and checks on ASIC’s banned and disqualified register.  Licensees should also conduct these checks when hiring key personnel for their business.  Licensees could also require responsible managers and officers to provide a signed declaration on a periodic basis, declaring any adverse circumstances that may affect whether they remain fit and proper.

Further, licensees should ensure that ‘fit and proper persons’ receive ongoing training on the fit and proper requirement and on any necessary disclosures they need to make to the licensee should their circumstances change, so that the licensee can take action and curb against the risk of a licence suspension or cancellation.

Finally, persons applying for an AFSL (or variation) should properly assess the key personnel in their business, including the responsible managers being nominated, to ensure that they are fit and proper.  Where ASIC requires that an officer resign or refuses to accept the nomination of a responsible manager, the licence application will be delayed.

Our team at Holley Nethercote are well-experience in project managing the AFSL application process.  If you would like our assistance with your application, or to request us to conduct an assessment of your proposed responsible managers, please contact us.  Our AFSL packages generally include a preliminary assessment of up to two responsible managers.

The above procedures should also be documented in internal policies maintained by the licensee.  We offer ongoing support to licensees through our online compliance portal, the HN Hub, which contains template policies for you to tailor to your business.  Contact us to find out more.

Author: Ellie Khor (Lawyer)

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[1] Sections 913B(1)(c) and 914B(2) of the Corporations Act 2001.

[2] Section 913BB of the Corporations Act 2001.

[3] Note that this ‘fit and proper test’ is distinct to the similar test which applies to ‘relevant providers’ of personal advice.

[4] Section 915C(1)(b) of the Corporations Act 2001.

[5] Section 9 of the Corporations Act 2001.

[6] Section 913BA(1)(d) of the Corporations Act 2001.

[7] Section 913BA(1)(e) of the Corporations Act 2001.

[8] Section 913BA(1)(c) and (f) of the Corporations Act 2001.

[9] See RG 105.38 and RG 2.223.

[10] See Information Sheet 240 (INFO 240).

[11] Section 915C of the Corporations Act 2001.

[12] Section 920A of the Corporations Act 2001.

[13] Section 920A of the Corporations Act 2001.