In Australia, operating a financial services firm necessitates holding an AFSL under section 911A of the Corporations Act 2001 (Cth). Even if financial services are tangential to your primary business, you still have this obligation.
Our AFSL attorneys at Equilex are experts in licensing, compliance, and enforcement issues.
Here is a thorough handbook that covers:
- An AFSL: What is it?
- Products and services that need an AFSL
- The test for "carrying on a business"
- Credit licensing requirements (ACL)
- Provider of foreign financial services (FFSP)
- Wholesale vs. Retail Customers
- AML/CTF registration requirements (AUSTRAC)
- The repercussions of not complying
#An Australian Financial Services Licence (AFSL): What Is It?
The Australian Securities and Investments Commission (ASIC) issues an AFSL, which is a license that permits people or businesses to offer financial services in Australia.
It is a fundamental component of the Australian regulatory framework, guaranteeing that financial service providers:
- Work effectively, truthfully, and equitably.
- Fulfill continuing reporting and compliance requirements.
- Safeguard retail and wholesale customers by acting appropriately.
You run the risk of operating illegally and facing enforcement action and reputational harm if you don't have the proper license or exemption.
#When Is an AFSL Necessary?
If you are operating a financial services business in Australia, you typically need an AFSL under section 911A of the Corporations Act 2001 (Cth).
This prerequisite is applicable even if:
- It is not your primary source of revenue.
- You don't profit from it.
- It is merely a portion of a larger, non-financial enterprise.
Another option is to work under a Corporate Authorized Representative (CAR) arrangement, in which a licensee gives you permission to offer financial services in accordance with their AFSL.
#
Important Financial Services That Need an AFSL
If you operate a financial services company, you will probably require an AFSL in order to:
- advise clients on financial products, such as suggesting which financial product the public or clients should buy.
- engage in a financial product, such as issuing interests in a managed investment plan or purchasing or selling shares on behalf of a customer.
- create a market for a financial product, for instance, where prices for purchasing and selling financial products are routinely quoted.
- run a managed investment scheme (MIS) that is registered.
- offer a custodial or depository service, such as holding a financial product or a beneficial interest in a financial product on trust for a client; offer traditional trustee company services, such as estate management tasks; offer crowd funding services; offer superannuation trustee services; handle and settle claims; or run a corporate collective investment vehicle (CCIV).
Chapter 7 of the Corporations Act and the Corporations Regulations 2001 define financial services and financial products.
The definitions are intricate and subject to explicit exclusions, qualifications, and inclusions.
You are probably covered by the AFSL if you deal with any of these financial products:
- Securities include bonds, debentures, and shares.
- Fund interests are part of managed investment plans.
- Life, general, and consumer credit insurance products.
- Superannuation products: savings for retirement.
- Products for deposits and payments, including non-cash transactions.
- Credit products include FX contracts, margin loans, and derivatives.
Digital products: Initial Coin Offerings (ICOs) and Crypto-assets: According to ASIC's INFO 225 advice, certain tokens and digital assets may be classified as financial products. A case-by-case evaluation determines if an AFSL is necessary.
Carbon credit: You could still have to abide by other rules, such as consumer protection under the Australian Consumer Law, even if you are not required to obtain a license (ASIC REGULATORY GUIDE 236).
#Australian Credit Licence (ACL) – Credit Activities
An Australian Credit Licence (ACL) is required if you offer services pertaining to consumer credit or leases regulated by the National Consumer Credit Protection Act 2010 (Cth) (NCCP).
This comprises:
- agreement for consumer credit.
- leases for consumers.
- Buy Now, Pay Later (BNPL) goods are currently being introduced into the system as inexpensive credit agreements.
Note: Only natural persons or strata corporations are subject to the National Credit Code.
#Wholesale vs. Retail Customers
The AFSL system in Australia distinguishes between wholesale and retail customers:
- Enhanced disclosure, behavior, and dispute resolution protections are due to retail clients.
- Some restrictions may be waived for wholesale clients, but a license is still required.
This discrepancy has important ramifications for AFSL compliance and scoping.
#Providers of Foreign Financial Services (FFSPs)
Foreign Companies Offering Financial Services in Australia Could Require:
- a typical AFSL;
- if governed in a "sufficiently equivalent" jurisdiction, a Foreign AFSL (FAFSL) may be possible;
- alternatively, one may rely on funds management relief or other exemptions.
Denmark, Germany, Hong Kong, France, Luxembourg, Ontario (Canada), Singapore, Sweden, the United Kingdom, and the United States are recognized as having comparable regimes.
Additionally, Australia takes part in the Asia Region Funds Passport (ARFP), which simplifies the distribution of managed funds across international borders.
#Important Signs That You Might Be Operating a Financial Services Company
Regulators and courts take into account things like the following when determining whether your actions qualify as operating a financial services business:
- A Business Location in Australia
Do you have a permanent base, branch, or office here?
- A Registration or Share Transfer Office
Have you set up an office in Australia for shareholder registrations or share transfers?
- Property Management or Administration
In Australia, are you managing or administering property as an agent or trustee?
The type and frequency of your activities are just as important as your location. The courts consider the level of continuity, repetition, and system.
Crucially, if a transaction is the first in a planned series, it may be regarded as continuing a business.
#Activities That Don't Constitute Operating a Business
Some actions alone do not qualify as operating a financial services business, such as:
- keeping a bank account in Australia.
- calling meetings of shareholders or directors in Australia.
- producing proof of property charges or debt.
- carrying out individual transactions and finishing them in 31 days.
- holding real estate or making passive investments.
These don't establish a financial services company footprint on their own and are regarded as incidental or administrative.
#Why it's important
Unless there is an exception, you will typically require an AFSL if your operations actually qualify as operating a financial services business in Australia. There are serious regulatory and reputational concerns associated with operating without a license when one is necessary, including the possibility of ASIC enforcement action.
#ASIC Penalties and Enforcement
It is a major violation of the Corporations Act to operate without an AFSL.
Among the penalties are:
- both criminal and civil penalties, including incarceration.
- severe penalties—millions of dollars for businesses.
- stop orders put an end to unlawful activity.
- freezing of assets.
- prohibitions on specific people.
- court-mandated company wind-ups.
- orders for client compensation.
AFSL compliance is actively enforced by ASIC. If a single unapproved financial service is meant to be a part of continuing unlicensed operations, it may be subject to examination.
#Important Takeaway
It's not always easy to distinguish between incidental behavior and operating a financial services business. You may need to think about whether an AFSL (or an exception) applies if your activities entail more than isolated or administrative activity.