Depending on your data source, there are around 15,000 financial advisers in Australia and around 3,400 holders of an Australian Financial Services Licence (AFSL) which can provide personal advice.
Around 85% of all advisers are associated with product manufacturers and it probably wouldn’t take a forensic examination of the numbers to conclude that the majority of Enforceable Undertakings from ASIC and disciplinary actions from professional associations in recent years have been handed out to the very large licensees and/or their representatives.
While it has been thirty years in the making, in many respects it has been a frenetic rush by the large licensees to accumulate massive amounts of funds under management. In the case of bank owned licensees, the rush was predicated on the deregulation of banking in 1980s; simply put with increased competition in home lending and related margin compression, banks had to find other arenas to generate profit and while the chase for funds under management was but one alternate source for them, it nevertheless has been integral in maintaining and then increasing their profits over time.
In the aftermath of the recent Senate Inquiry into the Commonwealth Bank’s scandalous management of both their planners and the related complaints, many planners might well be feeling they are being ‘tarred with the same brush’. The news media will only ever tell their consumers bad news and with CBA et al, there has been plenty of it. It is wasted effort to think that at some stage the media will report the good that truly professional financial planners bring to the lives of their clients and their families. It’s never going to happen.
While the very large licensees feature prominently in the public relations damage caused to financial planners generally in Australia, it doesn’t take bad media to create dissatisfaction with the services provided to representatives by a largish licensee. Advisers who have been in their role for several years might well question the value proposition of representing a licensee which they do not own and over which they have minimal, if any, say. Areas such as levels of fee sharing and Approved Product Lists are two areas where concerns can arise. And then there is the declining certainty of Buyer of Last Resort (BOLR) provisions.
So if you are serious about providing genuine professional advice and are tired of having a ‘guilt by association’ air about the business you represent or you are questioning the value for money you are receiving from your licensee, then you have a choice of two options. The status quo is of course the path of least resistance and for many, this is all they will ever want in their career. People who are happy to practice under someone else’s licence and who are happy to not take the burden of liability in the first instance. Note that failure to comply with a licensee’s legal obligations can still see representatives targeted for litigation – by the licensee. For those who reject the status quo and who are really serious about building a professional services business, there is the option of applying for their own AFSL.
Gaining control of your business destiny
In 1995 at the annual FPA Convention, I presented a paper titled: “Gaining control of your business destiny – becoming a licensed dealer”. Back before the Financial Services Reform Act 2001 (FSRA), licensees held either a ‘Securities Dealer’ or an ‘Investment Adviser’ licence. As the name suggests, dealers were licensed to ‘deal’ in securities; to arrange the purchase and sale of securities and they outnumbered Investment Advisers who could advise but not ‘deal’ in securities. Dealers could have either a ‘restricted’ licence or an unrestricted licence which generally meant the latter could deal in any form of securities. By contrast, generally speaking, restricted licensees were not able to deal in listed securities. As a side note, you will still often hear AFSL holders referred to as ‘Dealers’.
The 1995 paper was warmly received and criticised in seemingly equal proportions. Some existing licensees spoke against it during question time due to the simple (yet unspoken) fear of seeing their advisers leave and set up their own license. The supporters were advisers who had the reached the point in their career of questioning the status quo of working under another party’s licence.
Ten years later, in 2005, an adviser approached me at the FPA convention and said words to the affect that he wanted to thank me for that 1995 paper because it had prompted him to establish his own licence. At the time of the 2005 convention, he was in a ‘work-out’ period having recently sold his business for a very handsome amount of money. He said that getting his own licence was pivotal to being able to build his business under independent ownership and better prepare if for an eventual sale.
Changing licence eligibility
It’s now twenty years since I first obtained an AFSL (An Unrestricted Securities Dealer Licence in 1994) and the intervening period has seen a significant lift in the eligibility criteria. With the various iterations of the Corporate Law Economic Reform Program (CLERP) and the onset of the FSRA, it has become a more rigorous vetting process by the regulator.
However, it might come as surprise to some that it is far from difficult provided you study the requirements in detail and assess if you and your business can comply.
But first – what does your representative’s contract say?
Many advisers will have restraint of trade clauses in their contracts with their licensees which might have a serious impact on their cash flow once they leave and begin business under their own licence. The first point to make here is to be sure to have your lawyer review the contract so that you can make an informed decision about your situation if you obtain your own AFSL.
Your current contract might have a serious impact of the commercial viability of going out on your own. That said, it might just mean you need to plan how you will survive while you serve out the restraint period. One prominent adviser had a two year restraint of trade clause which he duly planned for in leaving his then licensee in 1997. The very day after his restraint period expired he commenced, with military like precision, a series of advertised seminars in towns and suburbs across the state he had former clients in and, he would proudly tell you, he eventually regained more than 90% of his previous clientele.
The easy part
The easiest part of applying for an AFSL is the application itself. The online form can be progressively saved on the ASIC site allowing you to continue completing the form at any time at your leisure. The key here is to know exactly what type of licence you are applying for. Some issues to consider:
- Will you want to be able to advise on listed securities?
- Will you want to advise on superannuation products?
- Will you want to hold a life broking licence?
- Will you want to advise on bonds and deposit type accounts?
The more difficult part
The more arduous part of the application process is the so-called ‘proofing documents’. These are the documents which you prepare to prove or validate the information you have given on the application form. This is where the largest time component is spent in applying for an AFSL and this is where you need to have a thorough understanding of the relevant legislation in order that you can demonstrate your capabilities and that of your organisation. It is possible for ‘sole operators’ to make application for an AFSL however the ASIC license assessors will be looking at the person’s resource capabilities to meet his/her obligations under the FSRA.
Regulatory Guidelines
In applying for an AFSL you will be referred to various Regulatory Guidelines (RG) and these are essential reading in the process of ensuring you will be able to comply with the requirements of the Acts.
In addition to the three parts of the AFS Licensing Kit, RG 104 Licensing: Meeting the general obligations is an excellent first source of information in assessing whether or not you will be able to meet the requirements of holding an AFSL. In this document you will find information on:
- Key compliance concepts
- Your broad compliance obligations
- Your risk management systems
- Your people
- Your resources
For example, RG 104.21 details how your obligations will be dependent on the nature, scale and complexity of the type of licensee business you wish to operate.
In regard to risk management, RG 104.62 states:
RG 104.62 We expect your risk management systems will:
(a) be based on a structured and systematic process that takes into account your obligations under the Corporations Act;
(b) identify and evaluate risks faced by your business, focusing on risks that adversely affect consumers or market integrity (this includes risks of non-compliance with the financial services laws);
(c) establish and maintain controls designed to manage or mitigate those risks; and
(d) fully implement and monitor those controls to ensure they are effective.
With reference to the above comments on ‘proof documents’, your proof document in regard to Risk Management would need to clearly illustrate how your AFSL business will comply with ASIC’s expectations. This is where the real workload lies in the overall application process. In effect, the AFSL application itself will be a dozen or so pages in length whereas the proof documents – in total – will be many times that quantity.
Planning
There are several components to planning to obtain an AFSL and they are essentially split into pre and post licence issuance segments.
The application process will absorb quite some time however with a concentrated focus and disciplined attention to preparing your proofing documentation, it is possible to successfully navigate to a licence being granted within ten to twelve weeks depending on individual circumstances, assuming you have successfully proved your eligibility.
The immediate period after you commence operations under your own licence is crucial. You need to know how your cash flow will be impacted by the change and, in your application, you will need to evidence to ASIC how you will manage your cash flow, both initially and in an ongoing basis. Some of the issues to address include:
- Capital expenditure in the establishment phase?
- If clients are transferring with you to your new AFSL, how soon after commencement will your fees be received and what will the business’ cash flow position be?
Equally important is the need to communicate your change to clients. Again, to restate, you need to be sure that you are meeting any contractual obligations under your existing representative agreement before communicating with clients.
You will need to have Professional Indemnity insurance cover in place to a level which complies with ASIC’s requirements. If ASIC is going to approve your application, you will be asked to provide evidence that the required level of PI cover is in place.
Licensing Kit
ASIC provides applicants with very detailed information on how to apply for an AFSL in its three part Licensing Kit. The kit is three downloadable documents which step through the process of making the actual application itself and the preparation of the proofing documentation. It should be the first reference people interested in obtaining their own licence.
Not for everyone
It must be stated: obtaining an AFSL is not for every financial adviser. There are many for whom it is entirely unsuitable. If you are in the business of simply selling investment products then an AFSL is most likely not for you. However, if you are serious about building a business which is owned in every respect by you/your business partners then it might be right for you. If you are serious about compliance and prepared to take on the responsibility for advice and portfolio management for clients, then it could be for you.
For and against
There are arguments for and against on both sides of this discussion. If you are considering your own AFSL as an option for your career, then you need to research the readily available information from ASIC and assess your capacity to obtain and retain a licence. If you proceed to apply, then allow plenty of time to prepare the application and proofs and carefully plan the transition for your business.
While it is easy to stand out from the crowd with your own AFSL you need to be sure to consider your clients in the whole process – after all they need to be the end beneficiaries of any decision to establish your own AFSL or remain as a representative of another party’s licence.
They should come first in all of your deliberations.
