Responsible Managers and the Key Person Condition – The Consequences

We have previously discussed what does it mean to be a Responsible Manager?

To recap, Section 912A of the Corporations Act, which sets out the key obligations of an AFS Licensee, requires a licensee to “maintain the competence to provide [the] financial services [covered by the licence]”.

ASIC through Regulatory Guide 105 – Licensing: organisational competence details what attributes you need to have in order to be appointed as an Responsible Manager.

These are:

• having direct responsibility for significant day-to-day decisions about the ongoing provision of your financial services;
• in conjunction with your fellow Responsible Managers, 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 five options for demonstrating appropriate knowledge and skills (these five options are set out in detail in RG 105 – reference RG 105.47).

Detailed below is a short discussion about the impact of where an AFS Applicant or AFS Licensee has access to limited Responsible Managers.

Where a Licence applicant nominates one Responsible Manager

During the Licence application process, ASIC will request additional supporting documentation requiring the applicant to detail its processes for recruiting appropriately skilled employees and also its succession planning framework if a responsible manager is unexpectedly unavailable.

ASIC considers succession planning is being particularly important for small businesses and will critically review the responses provided to ensure that the applicant has processes in place to ensure that the applicant will be able to meet its obligations as a licensee if the Responsible Manager is unavailable.

What is a key person Licence condition?

Where ASIC believes that a Licence applicant or licensee is heavily dependent on the competence of one or two responsible managers, it will impose a ‘key person’ condition on an AFS licence (reference RG 105.93).

The key person condition, detailed in ASIC Proforma 209, requires a Licensee to advise ASIC within 5 business days when a named key person ceased to be a Responsible Manager.  The Licensee is also required to provide details of any replacement Responsible Manager or, if no person will replace the key person, reasons why the licensee has not nominated a replacement Responsible Manager.

The critical point here is that the Licence condition imposes a timeline of 5 business days which is considerably shorter than the 10 business days a Licensee has to submit ASIC form FS20 advising of the cessation of the Responsible Manager.

A sudden resignation of a Responsible Manager who is also a key person can have a significant impact on an AFS Licence as it may no longer have the organisational competencies to provide financial services.  Where a Licensee fails to advise ASIC of the resignation of a key person or does not have a suitable replacement Responsible Manager it will need to consider reporting a breach to ASIC.

Ceasing Responsible Managers

Where an AFS Licensee ceases one or more Responsible Managers it will need to ensure that it maintains organisational competence.  ASIC may review the impact of any changes to the Responsible Managers even where there are no key persons named on the AFS Licence.  This review by ASIC may result in ASIC requesting that the Licensee demonstrate that it has the organisational competence in the remaining Responsible Manager(s).  ASIC may then form a view that the Licensee:

• has sufficient competence in the remaining Responsible Managers;
• has sufficient competence but is dependent on the competence of one or two responsible managers and will vary the AFS Licence to impose a key person condition;
• does not have sufficient competence across all of the Responsible Mangers and intends to vary the AFS Licence to remove those Licence authorisations where competence has not been demonstrated; or
• does not have sufficient organisational competence and intends to cancel the AFS Licence.

Some tips to keep the Key Person condition from your Licence:

• When applying for an AFS Licence, nominate more than one responsible manager with competencies that cover each of the intended financial service and financial product authorisations. For example, if you intend to be a financial planner, ensure that the two responsible managers have similar advice and dealing experience across the financial products being applied for.  If you intend to be a wholesale fund manager, ensure that there is more than one responsible manager who has the skills across operating a fund and also the across the assets of the proposed scheme.  This tip applies when intending to advise ASIC of a change in responsible managers;
• Develop a succession plan within the organisation to ensure that there are persons identified to replace an existing responsible manager. This process can be supported by undertaking a skills matrix across the Responsible Managers and those identified as successors to ensure that there is adequate coverage across each of the Licence Authorisations. It is also very important to ensure that those identified as potential Responsible Managers are willing to be nominated;
• Where a Licence is subject to a key person licence condition and persons are identified as potential Responsible Managers with similar competencies, consider appointing those person(s) and apply to vary the Licence to remove the condition. Undertaking this process while the existing Responsible Manager is with the Licensee is much easier to complete than when a key person suddenly resigns, and the Licensee needs to deal with the process during a change process.

One service we offer our clients is to prepare a skills matrix to determine the competencies across the nominated and proposed Responsible Managers of a Licensee.  We also assist clients in preparing and submitting licence variations to remove the Key Person condition.

Do you have more questions?

Author: Frank Varga (Head of Licensing)