Explaining the Australian Financial Services Licence: A Legal Overview

Written by Nicola Kelso

Within the Australian financial services sector, one of the fundamental legal instruments governing the conduct of financial activities is the Australian Financial Services Licence (AFSL). From a legal perspective, understanding the intricacies of the AFSL regime is vital for businesses seeking to navigate the complex regulatory framework while ensuring compliance and managing risks.

Understanding AFSL: The Legal Side

Essentially, an AFSL is an authorisation granted by the Australian Securities and Investments Commission (ASIC) which permits a business to offer financial services to customers in Australia. In order to obtain an AFSL, businesses must follow strict rules laid out in the Corporations Act 2001 (Cth) (Corporations Act) and related regulations. These regulations set out stringent requirements relating to licencing eligibility, application procedures, ongoing compliance obligations, and enforcement mechanisms to ensure that business operate legally and ethically.

Businesses are required to hold an AFSL if the business, or part of it:

• provides financial product advice, including personal advice or general advice;
• deals in financial products, including applying for, issuing, varying or disposing of a financial product;
• makes a market for a financial product;
• operates a registered scheme;
• provides custodial or depository services, this includes if your business holds financial products on behalf of someone else;
• provides traditional trustee company services;
• provides a crowd funding service;
• provides a superannuation trustee service;
• provides a claims handling and settling service; or
• operates the business and conduct affairs of a corporate collective investment vehicle (CCIV).[1]

Whether your business falls within the scope of any of these services or the provision of these products may be unclear, in which case you may need to seek advice on the appropriateness of applying for an AFSL.

Having Your Own Licence vs. Sub-Licencing: Legal Options

The decision to obtain your own AFSL or opt for sub-licencing under another licensee requires significant consideration, tailored to the specific legal, commercial, and strategic requirements of each business.

Having Your Own Licence:

Holding your own licence provides a business with legal autonomy and responsibility over the entity’s financial operations, regulatory compliance and liabilities. This autonomy provides licensees with the ability to determine their own services, prices and business models in accordance with the requirements of the Corporations Act and the specific strategic objectives of the business, without being subject to external constraints imposed by a principal licensee. However, this autonomy comes hand in hand with increased responsibility and risks. Such responsibilities include the obligation to maintain strict compliance procedures, legal governance structures and risk management and minimalization procedures.

Sub-Licensing:

Many financial services businesses choose to operate under another licensee’s AFSL. Sub-licensee’s will benefit from a more streamlined entrance into the market along with regulatory support and operational infrastructure which is provided by the principal licensee, simplifying the complexities associated with acquiring an AFSL. However, this arrangement places a heavy dependency on compliance by the principal licensee as sub-licensee’s are bound by the terms, conditions and regulatory obligations stipulated in the principal licensee’s AFSL.

Further, the arrangement between the sub-licensee and the principal-licensee is one that is governed by a contractual arrangement. As such, businesses operating under a sub-licence must ensure that they comply with the contractual obligations of both the AFSL they are operating under in addition to the contractual obligations imposed on them under the sub-licensing agreement.

When to Get Your Own Licence:

Several reasons may prompt businesses to get their own AFSL rather than choosing to sub-licence from a principal licensee. These considerations may include:

• Expanding Services: Entities seeking to offer a wider range of financial services beyond what their current licence allows may wish to acquire their own AFSL to allow for additional activities and products within their business structure.
• Meeting Client Expectations: Some clients, including high net-worth clients and institutional investors, may prefer to work with businesses that have their own licence for credibility and security reasons.
• Ensuring Long-Term Viability: Having their own licence can signal stability and commitment to clients and investors in addition to offering greater control and resilience among regulatory uncertainties and challenges.
• Legal Autonomy: Businesses wishing to have greater control over their operations, compliance frameworks and client relationships may opt for their own licence to reduce dependencies and streamline decision-making processes.
• Risk Management: Owning an AFSL allows businesses to manage legal risks and exposure inherent in the provision of financial services more effectively by having full control over compliance.

Risks of Having Your Own Licence:

While having an AFSL provides autonomy and control, it also exposes business to inherent risks and challenges to consider:

• Compliance Burdens: Keeping up with legal requirements can be complex and expensive, requiring ongoing vigilance and investment in compliance infrastructure to ensure adherence to evolving standards.
• Operational costs: Acquiring and maintaining an AFSL involves significant upfront fees and ongoing expenses, including application fees, compliance resources and regulatory reporting obligations, which can place a strain on financial resources, particularly for smaller businesses.
• Reputational Risk: Legal breaches or misconduct can damage a business’s reputation.
• Enforcement Actions: Non-compliance with AFSL obligations may expose businesses to regulatory sanctions, legal proceedings and reputational damage, requiring robust risk management and governance procedures are in place.
• Market Dynamics: Legal changes and industry trends can impact businesses, requiring them to adapt quickly in order for effectively navigate changing consumer preferences, technological advancements and regulatory reforms.

Navigating AFSL with Legal Awareness

Navigating the complexities of the AFSL requires a nuanced understanding and consideration of the legal requirements, strategic priorities and risks inherent in the provision of financial services in Australia. Whether opting for holding your own AFSL or sub-licensing under another licensee, businesses must assess the benefits, implications and obligations associated with each approach. While holding an AFSL offers autonomy and control, it also involves significant responsibilities and risks, highlighting the importance of prudent decision making, strong compliance frameworks and risk management procedures in order for a business to thrive in the ever-changing financial services industry.

[1] Australian Securities and Investments Commission, REGULATORY GUIDE 36: Licensing: Financial product advice and dealing (June 2016) RG 36.2.