Key recent changes to the Australian Financial Services Licensing Regime

09 October 2020

In brief

Australian Securities and Investments Commission (ASIC) made a number of key changes to the Australian Financial Services Licence (AFSL) regime this year, including:

• the introduction of a new ‘fit and proper person’ test to be applied to AFSL holders and applicants’ officers, ‘controllers’ of holders or applicants, where relevant, the officers and senior management of the controllers;
• the requirement to submit additional non-core proofs upfront as part of an AFSL application;
• the requirement to satisfy ASIC with respect to applicants’ COVID-19 arrangements by completing a ‘COVID-19 Requisitions’ document as part of the AFSL application pre-screening process; and
• the introduction of ASIC’s new powers in respect of directions, banning orders and disqualifications.

We have highlighted some practical considerations on what the impact of these changes mean for those looking to apply for or vary an AFSL. Some of these changes also apply to existing AFSL holders, so all existing AFSL holders should be aware of these changes and assess the potential impacts on their businesses.

In detail

New ‘fit and proper person’ test

New regulatory changes introduced under the Financial Sector Reform (Hayne Royal Commission Response—Stronger Regulators (2019 Measures) Act 2020 (Cth) (Reforms) on 18 February 2020 require all AFSL holders and applicants to satisfy a new "fit and proper person" test in respect of a range of persons related to the AFSL holder / applicant.

The reforms emerged from the Financial System Inquiry Final Report and the ASIC Enforcement Review Taskforce Report which identified gaps in the ASIC licensing regime and made recommendations to more effectively address poor behaviour and misconduct, including by aligning with the Australian Credit Licence (ACL) regime’s fit and proper test.

The new ‘fit and proper person’ test displaces the former ‘good fame and character’ test that applied to ‘responsible officers’ of an AFSL applicant, expanding the factors that ASIC can have regard to and the persons to whom the test can be applied.

Who is included in the new test?

The table below shows the expanded range of persons related to an AFSL holder or applicant who are required to comply with the fit and proper person test.

Notably, the new fit and proper person test applies to any person who ‘controls’ the AFSL holder or applicant as defined in the newly-inserted section 910B of the Corporations Act 2001 (Cth) (Corporations Act), right up the chain of ownership to the ultimate ‘controller’. ‘Control’ in respect of a body corporate includes the capacity to:

• cast or control more than half of the votes at a general meeting;
• directly or indirectly hold more than half of the issued share capital;
• control the composition of the board or governing body; or
• determine the outcome of decisions about financial and operating policies.

What are the requirements under the ‘fit and proper person’ test?

Under the fit and proper person test, ASIC looks at:

• whether the person’s Australian credit licence or registration or AFSL has been suspended or cancelled (formerly under the ‘good fame and character test’, only the person’s AFSL);
• whether the person has the been the subject of a banning or disqualification order made under Part 2-4 of the National Consumer Credit Protection Act (NCCP Act) (formerly only orders made under Subdivision B of Division 8 of Part 7.6 of the Corporations Act);
• whether the person has ever been disqualified from managing corporations;
• whether the person has ever been banned from engaging in a credit activity within the meaning of the NCCP Act;
• whether the person has ever been linked to a refusal or failure to give effect to a determination by AFCA;
• whether, in the last 10 years, the person has been convicted of an offence (formerly only an offence that involves dishonesty and is punishable by imprisonment for at least 3 months);
• whether the person has ever been a Chapter 5 body corporate or an insolvent under administration;
• any other relevant information given to ASIC by a State or Territory authority; and
• any other matter prescribed by the regulations or that ASIC considers relevant.

What is the process of the 'fit and proper person test'?

As part of an AFSL application or variation, ASIC requires each person required to comply with the fit and proper person test to complete and provide:

• a national criminal history check;
• a bankruptcy check; and
• a tailored 17-question ‘Statement of Personal Information’ questionnaire. A similar statement was previously only required to be completed by the ‘responsible managers’ nominated by an applicant.

This may involve significant logistical time and cost implications for applicants that sit within large corporate groups with complex ownership structures. Offshore controllers and officers are not excluded from providing the required documentation.

How does the fit and proper test apply to existing AFSL holders?

The fit and proper person test is an ongoing requirement, such that if any of the persons required to comply with the test (including officers, controllers and officers of the controllers) fail to meet the requirements, ASIC may suspend or cancel the AFSL.

ASIC may also make banning orders on a person it identifies as not a fit and proper person, from performing one or more functions as an officer of the AFSL holder, providing financial services or from controlling the AFSL holder.

As mentioned above, AFSL holders applying to vary their licences, including to add or remove authorisations or vary Responsible Manager or Key Person Condition details, will also be required to show during the variation application process that all relevant persons meet the fit and proper person test.

Additional non-core proofs to be submitted upfront

ASIC Information Sheet 240 (INFO 240) as reissued in April 2020 requires the upfront lodgement of additional non-core proofs as part of an AFSL application. Previously, the additional non-core proofs were not required to be provided upfront but would be requested by ASIC during its assessment of an AFSL application.

Additional non-core proofs are required for specific AFSL authorisations or in specified circumstances. Some common additional non-core proofs include:

• for custodial and depository providers (not applicable for incidental custody providers):
  • C1: Custodial/Depository Service Statement;
  • C1: Funds under Management/Custody Statement;
  • C1: Product/Service Distribution Statement;
• for registered entities (i.e. operators of registered managed investment schemes):
  • C2: Scheme Operating Capacity Statement;
  • C2: Scheme Property Statement;
  • C2: Funds under Management Details;
• for applicants outsourcing key activities:
  • B3: Outsourcing Statement; and
• for applicants nominating a single Responsible Manager for an authorisation:
  • B5: Human Resources Capacity Statement.

However, even if an additional non-core proof is not required to be provided upfront in accordance with the conditions in INFO 240, ASIC may still request its submission during its assessment of the AFSL application, for example, requiring a C9 MDA Operator Capacity Statement even where the MDA is offered to wholesale clients only.

Applicants should consider the full list of additional non-core proofs in Tables 1 and 2 in INFO 240 (link) and be prepared to make these submissions to ASIC as part of AFSL applications or variations.

COVID-19 Requisitions pre-screening requirement

In light of the COVID-19 global pandemic, ASIC has been issuing a 'COVID-19 Requisitions' document to applicants to complete as part of the AFSL application pre-screening process.

The 'COVID-19 Requisitions' document is a table that asks applicants to confirm if their arrangements in respect of a number of matters have changed as a result of the Government's approach to COVID-19, and to explain why the arrangements (whether the same or changed) are adequate.

Matters that will need to be considered include information technology, risk management and human resources arrangements, all of which are likely to be impacted to the extent of a business’ response to COVID-19, for example, working from home arrangements.

In particular, applicants are required to consider their outsourcing arrangements (if any) by identifying any external service providers engaged for substantial activities related to the proposed financial services and confirming that they are satisfied with the external service providers’ COVID-19 arrangements. We suggest that applicants make these inquiries of their external service providers while preparing for an AFSL application to be on the front foot to confirm and not incur delays once ASIC issues the COVID-19 Requisition.

ASIC’s new directions, banning orders and disqualifications powers

The Reforms also introduced a number of new and expanded powers for ASIC to:

• direct an AFSL holder to make a statement for the purposes of enabling ASIC to consider whether the fit and proper person test is satisfied;
• make a banning order or apply to the Court for a disqualification order against a person if the person is not a ‘fit and proper’ person; and
• cancel an AFSL if the AFSL holder does not provide a financial service before the end of 6 months after the grant of the AFSL. This applies to AFSLs granted before the introduction of the Reforms, so AFSL holders who were granted their AFSLs prior to 18 February 2020 and have not yet provide financial services should notify ASIC of their reasons for not using the licence or commence the financial services as a matter of priority.

The takeaway

The Reforms as well as the additional non-core proof and COVID-19 requirements are indicative of ASIC’s regulatory intent to more closely scrutinise potential and existing AFSL holders. The degree of regulatory change over the past year is in part a response to some of the findings from recent legislative inquiries into financial services as well as increased enforcement action by ASIC.

 All interested parties should continue to monitor the regulatory landscape to stay abreast of developments.