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New barriers to obtaining an AFSL contemplated by FSI

Posted on November 26th, 2015 by Sophie Gerber in AFSLs

cross-556110_1280The Government’s response to recommendation 29 of the Financial Systems Inquiry (FSI) to provide ASIC with stronger regulatory tools includes two significant powers which will impact our Australian Financial Services Licence (AFSL) clients:

1. Longer service times for ASIC to approve new AFSLs; and

2. Powers for ASIC to approve changes of licensee control.

Longer time frames for approving new AFSLs

Whilst ASIC’s licensing guidelines state that they will endeavour to grant an AFSL within 35 days of receiving a complete application, many applications take significantly longer than this.

Applicants for more complex AFSLs, including retail OTC derivative brokers and operators of retail Managed Investment Schemes, are likely to wait in excess of 6 months for a final licence to be granted by ASIC. The time which must be allocated to applying for a new AFSL is considerable and this has led many people to consider the option of purchasing an existing AFSL. The purchase of an existing AFSL is a quick way to enter the market and avoid ASIC’s lengthy licensing process. Many international investors consider this an attractive option and are actively seeking AFSLs to purchase.

Powers for ASIC to approve changes of AFSL control

The Government’s response to the Inquiry states that it will develop legislative amendments which enable ASIC to approve changes of licensee control. Whilst it is not clear at this stage what ASIC’s powers will entail, it is reasonable to assume that changes in control of AFSLs will be required to meet certain requirements and would be most likely need to be assessed and approved by ASIC prior to the finalisation of the change in control taking place.

This will give ASIC more scope to limit and control the instances of international investors purchasing and continuing to operate a range of AFSLs, a trend which we have seen becoming more prevalent over recent years with the market value of AFSL steadily increasing.

The sale of an AFSL essentially involves the sale of the entire company and shares in the company who holds the AFSL. Upon completion of the sale, the new owner of the AFSL is required to notify ASIC by providing them with a change of control letter. This is sent to ASIC after change of control has occurred and ASIC does not have the opportunity to halt the transfer.

These legislative amendments are a significant change to the level of intervention of government in what would ordinarily be a private transaction (i.e. the sale of a business). In addition, this allows ASIC to further restrict the continued operation of various types AFSLs and is likely to be another tool used by ASIC to suspend and cancel AFSLs. This is particularly relevant to margin FX AFSLs where we have seen an extensive focus by ASIC. This focus commenced in late 2013 where ASIC warned retail investors of the dangers of FX trading*. Australia’s attention on the FX industry has followed due to scrutiny by other Western regulators such as the U.S. Securities and Exchange Commission, the Financial Conduct Authority in the UK and the Financial Markets Authority in New Zealand.

Background to Financial Services Inquiry

In late 2013 the Australian Government established a Financial Systems Inquiry and recently released their response.

Of the 44 recommendations released by the Financial Systems Inquiry, the Government has accepted all but one. The implementation of such recommendations is stated as being beyond 2016, including one recommendation which has the ability to affect those looking for a quick entrance to the market, or a profitable exit from it.

*http://asic.gov.au/about-asic/media-centre/find-a-media-release/2013-releases/13-283mr-asic-warns-of-dangers-of-foreign-exchange-trading-for-retail-investors/

Alicia Pevely

Alicia works with Sophie Grace Pty Ltd with a particular focus on compliance and legal services. She assists clients with AFSL and ACL applications, variations and also assists in the implementation of compliance reviews. She provides ongoing compliance support as well as assisting in the preparation of legal advice, commercial agreements and disclosure documents.