License to practice: pros and cons of AFSL ownership

Malavika Santhebennur looks at the pros and cons of owning your own Australian financial services licence and weighs them up against becoming an authorised representative of a larger licensee.   

The fear of not surviving the global financial crisis (GFC) saw independent financial adviser groups run helter skelter from their own Australian financial services licences (AFSL) to the safe haven of institutionally owned groups.  

Six years later, with the GFC now a not so distant memory, advisers attached to larger institutionally-owned licences are questioning the vertical integration model.  

This is according to Synchron director Don Trapnell, who said financial certainty in the Australian economy has led to advisers re-evaluating their alignment to institutionally-owned licences.  

“In times of financial uncertainty the natural push is to go towards larger, bigger, better, safer havens.  

“But I think advisers generally really are fed up with being told by their licensee which insurance companies they need to support, particularly when that advice comes on the back of 'this is the owner of the company,” Trapnell said.  

“If you’re an authorised representative of an institutionally-owned licensee, your licensee gives you a financial incentive to support the parent companies’ products. Would that not be conflicted remuneration in its rawest form?”  

Trapnell believes the industry is headed towards a 'phoenix phase’, where it is going to see non-institutionally-owned licensees spread, with groups of advisers coming together and forming their own licence.  

“I think that’s a good thing for our industry because I think it removes the conflict that naturally occurs when the product and the distribution is owned by the same organisation.”  

However, another industry head believes the opposite, claiming more advisers will be handing their licences in.  

Former Count Financial chairman Barry Lambert previously wrote in Money Management that except for well-resourced licensees, advisers and planners were always on a “hiding to nothing” by having their own licence.  

He wrote having and maintaining an AFSL costs a lot of money and time, which could otherwise be used to build client relationships and grow the business.   

He said maintaining an AFSL demands investment in the right resources and knowledge in order to be abreast of markets, regulatory changes, products and compliance requirements.  

The Future of Financial Advice (FOFA) regulatory changes were also an impediment to getting an AFSL, as advisers were fearful of certain changes, particularly grandfathering arrangements and whether advisers would have to part with grandfathered revenue when they moved to new licences.  

The numbers  

The Australian Securities and Investments Commission’s (ASIC’s) 2013 annual report showed that in 2012-13, 97 new AFSLs were issued with the authorisation to give financial advice to retail clients in the year to 30 June 2013.  

A total of 3394 AFSLs are approved to give personal advice, while 1,395 AFSLs are authorised to provide general advice.   

ASIC undertook a review of financial advice industry practice, focusing on the top 21-50 advice licensees and 521 pieces of financial advice, and cancelled six AFSLs for failure to comply with the obligations.  

It banned four advisers, and imposed licence conditions on two licensees.  

After contacting licensees for failing to file annual financial statements and audit reports by the due date, 14 AFSLs were cancelled at the licensee’s behest.  

The trade-off 

There are different opinions on the viability and value of owning an AFSL but it depends on the individual, and the business.   

The Corporations Act 2001 stipulates people who provide financial services have to hold an AFSL, unless they fall under an exemption or can provide financial services as an authorised representative of a licence.  

One may need an AFSL if they deal with and provide financial product advice, make a market for a product, operate a registered scheme, or provide a custodial or depository service.   

Before applying for an AFSL, it is important for advisers to know their business and think about the financial services and products they intend to provide.   

They should only apply for authorisations that cover financial services and products that are applicable for their business.  

They should then support their application with proof documents, and make sure they have met their obligations.  

Then it is a matter of completing an application form (ASIC form FS01), submitting it to ASIC and paying the application fee.   

AFSL appeal  

The two biggest reasons advisers give for owning their own AFSL are flexibility and independence.   

William Buck director Fausto Pastro got his AFSL for the chartered accountants firm in 2000. The firm provides a range of services including preparation of financial statements and income tax returns, audit of financial statements, corporate advisory, insolvency, taxation advice, and financial planning.  

Pastro said the main driver for his firm to get an AFSL was to customise advice and financial products based on the clients’ needs rather than have someone else customise it.  

“It was pretty obvious leading up to the end, we needed an ability to provide comprehensive financial advice to our clients and not really be affected by dealers’ restrictions on financial products, or approved product lists (APL),” he said.  

Pastro said an AFSL means there are no conflicts of remuneration, and the adviser can sit on the same side of the desk as the client.  

“Our experience before we got our licence was that we had a weekly phone call from our dealer asking 'what have you sold this week in this area, what have you sold in that area?’”  

“They also asked us to be trained up in financial products that we probably had no interest in for our clients. All of that gets removed,” Pastro said.  

Director of the financial and wealth management arm of Ausin Group Mark Morcos finds similar benefits in owning his own AFSL, which he obtained through the services of a lawyer in March last year.  

Morcos said he wanted more flexibility in the market, with an ability for the firm to implement their own investment philosophy rather than being “dictated” by either a big institution or a smaller AFSL.  

“The industry is sort of controlled by the big financial institutions. They’re obviously in a situation where they have a lot of their own products on their APL,” Morcos said.  

“Having our own AFSL gives us a good point of difference so that we can provide the best advice for our clients and put the best products regardless of which institution they’re with on our own APL.”  

Head of private wealth management at Elston Partners Peter McVeigh found that after moving to an AFSL about six years ago, they were free to provide the services they wanted to clients.  

“From a business perspective you’re not constrained by the commercial aspects of the arrangement with your licensee,” he said.  

“You’re free to expand your business as you see fit without being dictated by a corporate setting sitting above pulling the string.”  

Trapnell believes advisers who are thinking about getting an AFSL should get it with a group of advisers who work in a common area together, have common interests and gel together.    

Money money money   

While owning your own AFSL can be a ticket to independence and flexibility, it comes at a cost, in terms of time, money and obligations, especially for smaller groups of three or four advisers.  

Pastro found that his firm had to pay over $50,000 in 2000 just to get it up and running.   

This included providing submissions to ASIC and developing compliance plans.   

But it would have been more than this because keeping the licence relevant and operational involves ongoing costs.  

“It’s not a set-and-forget. You’ve got to take steps to ensure your activities are in accordance with your compliance plan. And you need to change the compliance plan as the business changes.”  

Costs will once again depend on the individual and the business’ needs and specifications.  

According to ASIC, applying for an individual AFSL online or on paper through FS01 costs $841 as of 1 July this year, while applying for a corporate, partnership or trustee AFSL online or on paper costs $1585.   

If advisers want to vary AFSL conditions, applying online costs $262, while applying on paper costs $308.    

According to Trapnell, a licensee’s professional indemnity insurance costs alone would be substantial.   

Licensees with total revenue from financial services provided to retail clients of $2 million or less should have a PI insurance policy limit of at least $2 million for any one claim, ASIC said.  

Licences with more revenue should have minimum cover that equals actual or expected revenue, with a maximum limit of $20 million.    

Of course, some licensees may need a higher limit to cover them. They should consider if the indemnity level is enough to cover claims brought both inside and outside of the external dispute resolution scheme.   

Doing one’s duty  

While costs are often mentioned as the primary deciding factor, advisers also have to keep their myriad of obligations in mind once they start running their licence.  

Otherwise they could end up on a 'how not to do it’ list of AFSLs, similar to the fiasco of AAA Financial Intelligence (AAA FI).  

AAA FI and AAA Shares had their licences cancelled last year by ASIC for its “appalling record” that put its quality of advice to clients at risk.  

ASIC snatched AAA’s license after it was found the firm had failed to ensure planners had the knowledge and skills before appointing them as authorised representatives, and then failed to train them.  

It also did not provide enough financial resources to comply with its general obligations.  

Partner at law firm Holley Nethercote Commercial Lawyers Paul Derham believes licensees should be following the “10 commandments” or the top 10 obligations as set out in section 912A of the Corporations Act 2001.  

According to Derham, “thou shalt do all things necessary to ensure that your financial services are provided efficiently, honestly and fairly”.  

Licensees should also have sufficient arrangements to manage conflicts of interest, comply with their AFSL conditions and with the financial services laws, including Superannuation Industry Supervision legislation, most of the Corporations Act 2001, and the ASIC Act 2001.  

They also need to ensure their authorised representatives follow financial services laws, have sufficient information technology, human resources and financial resources to provide financial services and carry out supervisory arrangements, maintain competence to provide financial services, and ensure authorised representatives are well trained and capable of providing financial services.  

They should have a dispute resolution mechanism when dealing with retail clients, and have a good risk management system.   

Furthermore, Derham emphasised the need for licensees to maintain a corporate culture that facilitates compliance in the industry.  

Section 12.3(2) of the Commonwealth Criminal Code mentions that a body corporate can be found guilty of an offence if found that it was due to “an expression of a corporate culture of non-compliance, or of failure to maintain a corporate culture of compliance with the law”.  

“The Code says that a company can have the intention to commit a crime if it expressly, tacitly, or impliedly authorised or permitted the conduct and then that permission or the authorisation can be established where the corporate culture directs, encourages, tolerates or leads to non-compliance,” Derham said.  

A methodical way for a licensee to keep track of and document all its obligations is by appointing a compliance committee, which is not required by the law unless you are a responsible entity.  

“In our experience, if ASIC is investigating a licensee, they do look at those minutes, and they give clear evidence of the licensee turning their minds towards obligations and tabling registers that need to be up to date,” Derham said  

If AFSLs can keep track of their obligations, they can avoid panic when audit time rolls around. The registered auditor will have a look at the financial situation as well as the compliance framework, and this is a fairly high-level review.  

Other AFSLs might voluntarily request a compliance consulting business to conduct a licensee review, which involves an in-depth assessment of all procedures, and then a test to see if they are actually being applied.  

This involves a procedural, and a behavioural compliance element.   

“At the end of the day people get in trouble for behavioural compliance and so step one is seeing all the procedures are accurate but then the key step is making sure people understand those obligations and do the right thing,” Derham said.  

Someone to lean on  

That is a lot to take in for someone who is thinking of becoming an AFSL holder. If it is a bit overwhelming, then becoming an authorised representative may be the right option.  

While it might not offer the independence enjoyed by a licensee, authorised representatives can enjoy the backing of a bigger, established institution.  

It can also provide lead generation and allow an adviser to build their business through other contacts to which the AFSL has access.  

AON Hewitt Financial Services’ Mick Sykes looks at the authorised representative status as one that provides support in areas of compliance and the regulatory framework, as the industry faces ongoing changes.   

He said he can rely on the firm to inform him of any changes to laws and compliance frameworks, and he does not have to worry about constantly monitoring the ASIC website for information.  

“You can deal with a specific client and need specific compliance advice on how to handle issues or the way that we’re delivering advice. So that gives me a daily access to compliance offices if I need that,” Sykes said.  

“I also prefer working with a team. I’m probably not one of the guys who wants to be a lone ranger and go out and do it all myself.”  

Wealth Partners director Andrew Heaven agrees, and said an authorised representative does not have to interpret legislation on how to practice advice as someone else is responsible for interpreting advice standards.  

He believes that as a financial planner under the AMP umbrella, it is a function of scale, and he gains credibility because clients can see a large institution backing the advice.  

“I can market my own brand in Wealth Partners, or if I want, I can align myself closely with a large licensee,” he said.  

“If you don’t have your own brand, you can leverage off the brand of the large institution but in terms of the actual licensee itself we treat them as external consultants to the business.  

“This way you get the opportunity to get access to resources to help you build your business that a lot of independent guys wouldn’t be in a position to access without considerable cost,” he said.  

Heaven said he has never felt constrained by the APL because he can apply for a one-off approval for a product to be available for advice if he cannot find what he needs on the APL.   

But he acknowledges being an authorised representative of a large licensee impedes him from marketing himself as an independent firm, and some people see independence as critical to their business model.    

What about accountants?  

The accountants’ exemption under the Corporations Regulations 2001 meant accountants could advise on self-managed super funds (SMSF) without needing an AFSL.  

But come 1 July 2016, accountants who want to advise on super products, securities, general and life insurance, and basic deposit products will have to attain at least a 'limited’ AFSL.  

While this has been available since 1 July, 2013, it has not grown in popularity among accountants.  

ASIC commissioner Greg Tanzer recently revealed data during a CPA Australia SMSF conference that showed the regulator had received 62 applications for limited AFSLs, with 27 receiving approval.  

Of these, 25 were from new applicants and two were conversions from current AFSLs, while 15 of the approved applications were submitted by Public Practice Certificate members of CPA Australia.  

Pastro said he has not seen much discussion around this among his colleagues. He said they should be asking themselves many questions on what is going to happen to their capacity to provide advice on SMSFs after 1 July 2016.  

“How relevant is it to maintain their ability to provide advice in relation to SMSFs? How important is this to their clients?  

“Is it sufficient to provide only strategy advice after July 2016? How appropriate is it for them to be able to provide more general or more holistic advice in relation to more detail strategies?” Pastro asked.  

He finished off saying accountants should think about advice to retail clients on credit, housing loans, and restructure of personal debts.  




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