Much has been written about the slow take-up of accountants’ limited Australian Financial Services (AFS) licences with many questioning why take up has been so slow. But we think the answer is clear — accountants have merely done what accountants do best; i.e. they have done their sums. And their conclusions have overwhelmingly been that limited licensing doesn’t add up.
As much as it pains us to say and as much as we’d prefer to make a positive contribution to the debate, in imac legal & compliance’s opinion the limited licensing regime is seriously and structurally flawed.
What do we mean by that? Let’s explain.
Our experience is that there is a broad chasm between the way accountants typically operate and the stringent compliance requirements of the financial services regime. Accountants, like most professionals, have great freedom as to how they can operate their accounting businesses. It can be quite a culture shock when accountants look at expanding into financial services and realise how compliance-driven and procedure-dependent it is.
While accountants are well-versed at acting in their clients’ best interests and keeping effective file notes for example, they are also used to providing their advice just by picking up the phone, in emails, and via any manner of documents. And all of that can be done in as freestyle a way as they please, without the myriad disclosures and other compliance obligations such as the safe harbour best interests tests that dominate the financial services landscape.
And when you compare that freestyle way of operating (typical of most professions, where the professional themselves are treated as grown-ups who know how to act in good faith and in a client’s best interest) with financial services, it really is like chalk and cheese. The distinctions are even sharper when comparing accounting to AFS limited licensing.
The limited licensing regime requires accountants to have a fine grasp of a raft of subtle and highly nuanced rules in order to comply with the obligations, even though most accountants will use their authorisations only occasionally. For example, limited licensing contains the following rules and restrictions, on top of the general obligations as a licensee:
- Even though there are no limitations on the actual advice to recommend a self-managed superannuation fund (SMSF), such advice typically involves existing funds. But accountants can advise on non-SMSF super only to the extent necessary to determine if the SMSF is in the client’s best interests or to provide advice on contributions or pensions under a super product. Anything broader than that is prohibited;
- Accountants can provide only ‘class of product’ advice on securities, general and life insurance, basic deposit products. They can also provide class of product advice on super itself. But that means that accountants won’t be able to recommend particular securities or insurance products for clients, even though SMSF trustees now have a legal duty to consider insurance. And the same goes with basic deposit products — even if accountants have found favourite deposit accounts over the years they won’t be able to recommend that particular product;
- Accountants can’t advise clients to close old superannuation accounts;
- Because accountants can’t advise on particular securities or basic deposit products they can’t advise clients to buy, hold or redeem certain securities or to close particular basic deposit products. Nor can they ‘arrange’ any financial products other than the SMSF itself. So, they won’t be able to arrange to open a bank account, for example, or rollover superannuation funds.
Breaches left, right and centre
Which all begs the questions, is it really worth it and who will be able to comply with such restrictive requirements? In our view, it will be virtually impossible for even the most professional, well-intentioned accountant to comply with these idiosyncratic requirements. We think breaches will be going off left, right and centre. And none of it is the accountants’ fault.
Could anyone comply with all those fine distinctions, limitations and obligations let alone accountants who are new to the financial services regime? The likelihood and risks of non-compliance are in our view extremely high. In our view, it will be impossible not to transgress, even innocently. The problem lies squarely with the ill-fitting regulatory model being used.
Also, such highly nuanced compliance obligations give rise to obligations to also employ highly nuanced compliance systems to monitor compliance. To do this sort of compliance monitoring well won’t come cheap. And this is all before you even start looking at the financials of such arrangements.
From what we have seen, $5,000 to $6,000 would be a rock bottom sort of annual fee to maintain a limited licence. Typical costs include: professional indemnity (PI) insurance, monitoring and supervision, financial requirements, external dispute resolution (EDR) membership, ongoing compliance obligations (e.g. reviewing and updating your policies and procedures, meeting the general conduct obligations), filing your compliance certificate, meeting your ongoing training requirements and, perhaps using commercial software to help you produce Statements of Advice. Plus accountants will have a raft of setup and establishment costs as well. It seems to us that accountants will need to either do a lot of SMSF advice to make a limited AFSL worthwhile or be prepared to use limited licensing as a loss leader for strategic reasons.
In other words the limited licensing regulatory solution is too cumbersome and expensive to fit the need in the market. It is not fit for purpose.
In imac legal’s view, even though it will be more expensive we think full AFSLs (or, full authorised representative status under a third party’s licence) are a much more legitimate solution for accountants than limited licensing. Or, if accountants can’t justify that expense, then establishing trusted referral relationships with financial advisers will be another viable solution with the financial adviser undertaking all the necessary activities under their AFSL and the accountant maintaining their strong client relationship.
Ian McDermott is a specialist financial services lawyer.
