When is it fit and proper for ASIC to cancel licences?

From

Jaime Lumsden Kelly

The ASIC Enforcement Review Taskforce released its third Position and Consultation paper in June 2017 (the Position Paper). The paper explores how to strengthen ASIC’s licensing powers. Over the next five posts I’ll outline the good, the bad and the rather ugly consequences of some of the proposed changes and suggest some alternatives.

Kicking off the series, let’s look at ASIC’s powers in relation to the fit and proper person test.

There needs to be consistency

Under the current AFS regime, licensees’ Responsible Managers must pass the test of “good fame or character.” This is not as stringent as the “fit and proper person” test that applies to credit licensees’ Responsible Managers. So it makes sense that ASIC wants to bring both of the regimes under the same, higher standard.

But, I don’t think it’s appropriate to extend the test as a blanket rule. If we look overseas to countries like Hong Kong, Singapore and the UK, some industries are often not subject to these tests, specifically:

  • General insurance;
  • Life insurance;
  • Payments systems;
  • Basic deposit products;
  • Simple foreign exchange; and
  • Financial planning.

It would be better if the fit and proper person test did not apply to licensees that provide these services exclusively.

ASIC’s resource constraints are impacting investors

It is also proposed that the fit and proper person test be extended to “controllers” of a licensee. This would also grant ASIC the power to refuse, suspend or cancel licences where the controllers are not fit and proper people.

If there is a change of control, a licensee is currently required to notify ASIC within 10 business days of becoming aware of the change. Under the proposed new powers, ASIC would then consider the new controller to determine if they are a fit and proper person. If the new controller does not pass the fit and proper test then ASIC would be able to suspend or cancel the licence.

During this time a business would be able to continue to trade so sales can proceed without being delayed by the regulator’s assessment. While ASIC hasn’t proposed a pre-approval process, the possibility of this hasn’t been entirely ruled out either.

Assessing whether a controller is fit and proper is resource-intensive. ASIC already has a resourcing problem, with our clients experiencing processing times of between 8 and 12 months for AFS licences and upwards of 7 months for credit licences. The assessment of whether new controllers are fit and proper people (either before or after the completion of the transaction) will probably delay licensing applications even more.

Ironically, long processing times have in part created a secondary market for licences, and ASIC is now trying to solve its resourcing problems by increasing its compliance powers. Implementing these powers will increase their workload and only exacerbate the underlying problem.

ASIC’s powers should be restricted if circumstances change

If ASIC is granted the power to suspend or cancel a licence when there is a change of control, it has the potential to destroy the value of an investment when there’s been no misconduct—to the detriment of any other shareholders who are fit and proper people. This could result in the value of a shareholder’s investment in the licensee being lost, in whole or part, due to no fault of their own.

This power also has the potential to harm consumers where a licensee can no longer service them on short notice, particularly people who are:

  • In the middle of a transaction (for example if they’ve received advice about life insurance but the placement of their policy is pending);
  • Actively managed (for example clients of managed discretionary accounts); or
  • Relying on the licensee’s systems to manage their own investments, like users of IDPS services.

Of course, these concerns exist whenever a licence is suspended or cancelled, but they can be avoided.

We can look towards the Hong Kong system for a better approach. In Hong Kong, the Securities and Futures Commission can restrict the powers of a substantial shareholder without affecting their licence.

For example they may prevent the shareholder from being involved in the management of the business, deem any votes they cast as void, and take any other steps if necessary. This approach protects the licence, its clients, and other shareholders, while ensuring that the controller in question cannot affect the business.

By Jaime Lumsden Kelly

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