Being the holder of an Australian Financial Services License (AFSL) requires businesses to meet certain obligations. However, meeting obligations is about more than just obeying laws. It ensures that there is integrity in the Australian financial system and more specifically the funds management industry. This ensures that fund managers and their investors can have some certainty and confidence knowing that they can conduct business in a fair and transparent environment. It provides a level playing field for all managers.
Given the increased focus on compliance and back office operations over the past several years and as an AFSL holder ourselves this Insight has been written as a refresher for those that want a quick review of their obligations explained.
There are 9 key obligations that AFSL licensees must comply with. These are summarised below:
- Financial Requirements – Solvency & Cash
- Responsible Managers – Qualifications & Experience
- Monitoring, Supervising and Training – staff and Authorised Reps
- Compliance & Risk Management – establish and maintain adequate systems
- Technological and HR requirements
- Managing Conflicts of Interest
- Dispute Resolution – when dealing with retail clients
- Compensation and Insurance arrangements
- Conduct and Disclosure – provide relevant financial services efficiently, honestly and fairly
What must happen at a minimum…….
For all of the above obligations AFSL holders are expected by ASIC to:
- Document measures in some form (see RG 104.23);
- Fully implement them and monitor and report on their use (see RG 104.24–RG 104.27); and
- Regularly review the effectiveness of your measures and ensure they are up-to-date (see RG 104.28–RG 104.29).
If you do not do this, it will be assumed by ASIC that you will have difficulty complying with the general obligations, and showing you are complying with them. (RG 104.22). There are varying levels of information and detail required which are determined by the nature, scale and complexity of your funds management business. (see RG 104.18–RG 104.19).
ASIC emphasise that it is not enough just to document your measures. You also need to fully implement them. This means you need to put them into practice and integrate them into the day-to-day conduct of your business. (RG 104.25). For measures to work effectively in practice, you need people at all levels of your business, including your senior management, to understand them and be committed to their success. Integrating your measures into the culture of your business helps ensure they are effective on an ongoing basis. (RG 104.26) You also need to monitor and report on your compliance, including reporting relevant breaches to ASIC under s912D. And keep the records!
What about if we outsource these requirements…..
Where some of the above functions are outsourced, the AFSL license holder still ultimately bears the obligation, not the party to whom it is outsourced. In this case it is expected that AFSL holders will:
- Have measures in place to ensure that due skill and care is taken in choosing suitable service providers;
- Monitor and document the ongoing performance of service providers; and
- Appropriately deal with any actions by service providers that breach service level agreements or your obligations as a licensee.
It is expected that businesses will allocate to a Director or Senior Manager responsibility for:
(a) overseeing compliance measures; and
(b) reporting to the governing body (including having ready access to the governing body). RG 104.47
In addition, AFSL holders need to ensure that the area responsible for compliance:
(a) is independent enough to do its job properly;
(b) has adequate staff, resources and systems; and
(c) has access to relevant records. RG 104.48
Wholesale or institutional AFSL holders need to be just as diligent as retail fund managers with complying with their ongoing AFSL obligations, and be aware that they are subject to the same monitoring and scrutiny from ASIC as retail AFSL holders. In July 2016 ASIC cancelled the licensee of a wholesale fund manager who failed to meet their compliance obligations and went on to remind wholesale fund managers of the importance of complying with their ongoing AFSL obligations, stating that “ASIC takes compliance with these obligations seriously as they are important to ensure we have efficient well-functioning financial markets”.
The above points are a brief summary of some of the main issues that Gateway suggests that all Fund Managers review regularly and be on top of. More information can be found via ASIC’s website. This can be accessed at http://asic.gov.au/regulatory-resources/find-a-document/regulatory-guides/rg-104-licensing-meeting-the-general-obligations/