What makes a limited AFSL so appealing to accountants?

Touted as the next frontier for accountants, Limited Australian Financial Service Licences (AFSLs) are starting to gain traction with planners too. But what makes them so appealing, ask Paul Derham and Megan Jaksa. 

The end date for the accountants’ exemption is set for 30 June 2016. After that, accountants recommending self-managed superannuation funds (SMSFs) will need an Australian Financial Services Licence (AFSL).

Recently, we ran a seminar titled “Full AFSL vs Limited AFSL for Accountants”, and were surprised by the attendance. We expected a majority of unlicensed accountants.

However, all of the sell-out crowd were already fully licensed. Some were Corporate Authorised Representatives and others were self-licensed financial planning practices.

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So, what was their primary motivation in understanding limited AFSLs?   

Two words: Securing referrals.   

Background 

Let’s go to 2010 for some history. As a result of excellent lobbying from the accounting bodies, Corporations Regulation 7.1.29A was inserted into the Corporations Regulations 2001 which allowed recognised accountants to recommend the acquisition or disposal of an SMSF.

Since then, the non-licensed body of accountants have been active in recommending the setup of SMSFs, often then referring the preparation of the SMSF investment plan and other strategic matters to licensed financial planners.  

Until now.   

We are currently in a transition phase, where recognised accountants – members of one of the three professional accounting bodies who meet certain requirements including holding a Public Practice Certificate – can apply for a “limited” AFSL to continue their SMSF recommendation activities post-30 June 2016. 

It’s described as “limited” but is a huge expansion on what could be done under the accountants’ exemption.   

Strategic, but not specific              

The limited AFSL is so good that some full AFSL holders have actually downgraded their authorisations from a full AFSL to a limited AFSL.   

Why? Well, in addition to recommending the establishment or disposal of an SMSF (and commenting directly on the client’s existing superannuation products), the limited AFSL holder can provide strategic advice.

Strategic advice, but not specific advice. Accountants can provide “class of product” advice that goes well beyond the old portfolio allocation exemption contained in 7.1.33A of the Regulations, (which, interestingly, will survive the removal of the accountants’ exemption). 

The portfolio allocation exemption says that recommending allocation of a person’s funds across shares, debentures, deposit products, managed investments products, investment life insurance products, superannuation products and other types of asset (eg, real property) is not a financial service requiring an AFSL.  

Under the “class of product” advice authorisations, limited AFSLs can advise on securities, superannuation, general or life risk insurance, simple managed investment schemes and basic deposit products.

This doesn’t include advice on specific products (except to the recommended SMSF setups and disposals), and also excludes derivatives advice.   

Treasury provides the following examples of advice you can provide under a limited AFSL: 

• Advice on the sorts of life insurance cover (for example, life cover, total and permanent disability cover, trauma cover and income protection) that would be appropriate for a client in light of their relevant circumstances (for example, their existing level of cover) and whether they should hold the cover directly or through a superannuation fund;  
• Advice on which simple managed investment scheme would be appropriate for and in the best interests of a client – for example, cash funds versus equity funds; 
• Advice on whether shares are an appropriate investment option given a client’s relevant circumstances, including their tolerance for risk and whether alternative classes of product might be more suitable; and  
• Advice on the types of basic deposit products that would be appropriate for and in the best interests of a client saving for a home deposit (for example, term deposits, online savings accounts or first home saver accounts). 

Limited AFSL holders can also continue to provide some advice about direct real property (which is not a financial product). 

The Australian Securities and Investments Commission (ASIC) has also outlined transitional provisions to assist accountants obtain limited AFSLs.

All licensees need Responsible Managers (RMs) to prove to ASIC that the business has the competence to provide the financial services. This includes leaping over the difficult experience hurdles in Regulatory Guide 105. 

But, as part of the limited AFSL transition provisions, ASIC has relaxed its requirements. If you apply for a limited AFSL and the nominated RMs are recognised accountants, ASIC will accept that the RMs meet the ordinarily onerous experience requirements.

This exemption only applies for the transition period, so accountants need to apply to ASIC before 30 June 2016 or run the risk that ASIC will reject their nominated RMs altogether.  

A financial planner’s obligations 

The ongoing obligations tied to a limited AFSL are not far removed from a full AFSL. The main difference is that limited licensees who don’t touch client money can avoid the costly annual expense of an external audit.   

The other day-to-day licensee obligations still apply, relating to financial requirements, professional indemnity insurance and the general conduct and disclosure obligations.

We call the 10 obligations imposed by section 912A of the Corporations Act the “10 Commandments” which include maintaining adequate resources, risk management systems, training, compliance arrangements and more. 

Importantly, if you give personal financial product advice under a limited AFSL, you will still need to prepare a Statement of Advice or Record of Advice for the client. These are big changes for accountants and it will take time and coordination to get these processes in place. 

Securing referrals 

For years, dealer groups have attempted to appoint accountants as authorised representatives (ARs). What happens in practice is that an accounting business will appoint one or more of their staff to become planners or accountant-planners who recommend strategies and products. 

The ongoing fee generally isn’t lucrative for the dealer group, but driving business through their preferred platform is (at least until Future of Financial Advice reforms take effect).

With the removal of the accountants’ exemption, licensees have gone into overdrive.

Offers to accountants include platinum, gold and silver packages, with some large dealer groups dedicating huge budgets to getting practices on board. 

This approach has advantages for both parties: the accountant doesn’t have to go through the expense and effort of getting and keeping an AFSL, and the dealer group can secure their referrals and indirectly, distribution.

It also has disadvantages – depending on the agreed service offering and the compliance culture of the authorising licensee, it could be more expensive and more onerous for the accountants than getting their own shiny new limited AFSL. 

If accountants are authorised by dealer groups to simply continue recommending the establishment or removal of SMSFs, they’re not directly contributing to platform revenues.

It will be interesting to see if dealer groups start offering to increase their authorisations for little or no cost, to provide these new accountants with an incentive to offer product advice via their preferred platforms. 

It will also be interesting to see if there’s a sharp increase in accountants operating under a general advice-only model. We think there will be. 

Anecdotal comparisons provided to us show that from a cost perspective there’s no clear winner. For example, increased professional indemnity (PI) insurance for a licensee can be expensive.

However, some PI insurers have uplifted accountant premiums by less than 10 per cent to account for their new AFSL. 

What about other set-up costs?

Some dealer groups are offering packages for around $6000 per annum. In contrast, accountants with the required human resources can get their own limited AFSL and template documents from some of the professional associations at no cost beyond their existing membership fee. 

Getting the facts 

We have worked with the professional accounting bodies in the ICAA and CPA Australia to create some practical guides and templates to assist accountants to apply for their limited AFSLs.

If you are a member of one of those bodies and have a Public Practice Certificate, get in touch with them to access guides on what a limited AFSL will mean for you, your obligations under an AFSL and resources to help you apply for and operate your AFSL. 

ASIC has created a range of resources that are available from its website: 

• Information Guide 179 contains information about applying for your limited AFSL. 
• ASIC’s Licensing Kit comprises Regulatory Guides 1, 2 and 3 and gives an overview of the process for applying for or varying an AFSL. 
• Regulatory Guides 104, 126, 165 and 166 outline various obligations that apply to AFS licensees. These are especially useful if an accountant is looking to apply for an AFSL for the first time. 

If you or your accountants are considering applying for an AFSL for the first time, or varying your existing AFSL, it is important that you understand all of the obligations involved. You can find the original legislation at www.comlaw.gov.au. Legislation of particular relevance includes: 

• Corporations Act 2001; 
• Corporations Regulations 2001; and 
• Corporations Amendment Regulations 2012 (No 3) – this is the specific set of regulations that introduces the limited AFSL. 

(Holley Nethercote has another information seminar running on 20 February 2014 – Google “Holley Nethercote” to register from the homepage.) 

The future 

You’ve probably already talked to your accountants about the proposed changes.  If you haven’t already done so, you need to weigh up the pros and cons of: 

• Doing nothing; 
• Offering to authorise accountants to simply continue recommending the acquisition and disposal of SMSFs; 
• Offering them something broader authorisations; or 
• Strengthening existing contractual referral arrangements and encouraging your accountants get a limited AFSL. 

(Holley Nethercote has prepared a one-page mind map to summarise the issues around getting and holding a limited AFSL.) 

Paul Derham is a partner and Megan Jaksa an associate at Holley Nethercoate.