AFS Licensees – Understanding Your Financial Requirements Obligations

Under section 912A(1)(d) of the Corporations Act, all Australian Financial Services (“AFS”) Licensees (except those regulated by APRA) must have adequate financial resources to provide the financial services covered by their licence and to carry out supervisory arrangements. Having adequate financial resources is also important for the management of financial risks, which is another obligation of AFS Licensees (section 912A(1)(h) of the Corporations Act).

AFS Licensees can comply with their obligations to have adequate financial resources if they meet the applicable financial requirements as summarised in ASIC’s Regulatory Guide 166 (“RG166”). Depending on the type of AFS Licence held, the cash needs and audit requirements may be tailored.

We have summarised the requirements broadly below: 

1. Solvency and Positive Net Assets – AFS Licensees must be solvent and maintain positive net assets at all times;
2. Cash Needs – AFS Licensees must meet the cash needs requirement in accordance with one of the five (5) options outlined in Table 3 of RG166 (for example, by preparing cash flow projections) and show that they have sufficient resources to meet their anticipated cash flow expenses; and
3. Audit – AFS Licensees must lodge audit and financial reports within the prescribed timeframes.

Some AFS Licensees are subject to additional financial requirements:

1. Surplus Liquid Funds (“SLF”) Requirement – AFS Licensees that hold client money of $100,000 or more must hold at least $50,000 in surplus liquid funds.
2. Adjusted Surplus Liquid Funds (“ASLF”) Requirement – AFS Licensees (except retail OTC derivative issuers) who transact with clients as principal must hold at least $50,000 plus a percentage figure of their adjusted liabilities (refer to Part D of RG166);

3. Net Tangible Asset (“NTA”) Requirement – the following types of AFS Licensees are required to hold NTA of a certain minimum value (the amount varies depending on the type of licensee):

• • Market and clearing participants
  • Responsible entities
  • Operators of investor directed portfolio services (IDPS)
  • Licensed custodial or depository services providers
  • Trustee companies providing traditional services
  • Issuers of margin lending facilities
  • Retail OTC derivative issuers
  • Corporate directors of retail CCIVs