ACL: To licence or not to licence
Planners who offer credit assistance or act as an intermediary may want to consider whether an Australian Credit Licence (ACL) would be a valuable addition to their practice, Michelle Chasser writes.
A few years have passed since the consumer credit laws and licensing regime commenced back in 2010, which means now may be a good time to review your options when it comes to offering credit services in addition to your financial advisory services. You may be a credit representative of an Australian Credit Licensee thinking about making the move to your own licence. Maybe you have never helped clients with acquiring loans but want to be able to. Or perhaps you want to avoid accidentally being caught by the credit regime altogether. This article considers some of these options.
When are financial advisers most likely to be caught by the credit regime? When they provide credit assistance or act as an intermediary.
Broadly speaking credit assistance is assisting, or suggesting, that a consumer enter into, increase the credit limit of, or remain in a particular credit contract or lease with a particular credit provider or lessor. In essence, that means if you assist a client to apply for a home loan from a bank, that is credit assistance. If you suggest that a client leases a car through their local car dealer, that is credit assistance. If you suggest that a client keeps their credit card with their current bank, that is also credit assistance.
For the purposes of the credit laws you act as an intermediary when you directly or indirectly act as an intermediary between a credit provider and a consumer for the purposes of securing credit for the consumer under a credit contract with the credit provider. This is a very broad definition which captures a number of activities including when you refer clients to a broker.
If you are reading this and thinking “I do that but I’m not authorised under a licence!” don’t lose any sleep. There is an exemption that you can use; you may already be using it without realising. We will discuss the exemption later in this article.
Readers familiar with the financial services regime will also notice that credit assistance is similar, but not identical, to providing financial product advice and dealing by arranging on behalf of another.
Nonetheless, if you provide credit assistance or act as an intermediary you will need an authorisation under an Australian Credit Licence (ACL) unless one of the exemptions apply. So what are some of your options?
Get your own ACL:
- Become a credit representative of another licensee;
- Utilise the referral exemption;
- Be careful to avoid providing credit assistance altogether.
Considerations
- Cost – there are costs involved in setting up and running your own ACL. ASIC fees, PI insurance and ongoing compliance to name a few. It may be more cost effective to become a credit representative of another licensee.
- Liability – licensees are ultimately responsible for all credit activities engaged in under their licence and compliance with the credit laws. Are you comfortable having that responsibility?
- Resources – do you have sufficient human resources to supervise credit activities and ensure compliance with changing credit laws?
- Control – do you want the freedom to suggest any credit product that you think is suitable for your client? If you are a credit representative you may be bound to your licensee’s approved product list.
- Work load – do you have enough work to justify becoming a credit representative or licensee? Is it better to just refer the few clients that require credit assistance to someone else?
Option 1: Leaning towards getting your own ACL?
In our experience, the biggest hurdle in getting your own ACL is having appropriate responsible managers (RMs). If you do not have suitable RMs, ASIC will not issue an ACL. RMs demonstrate that a licensee is competent to engage in credit activities. To demonstrate that competence and be accepted by ASIC, RMs are required to have specific qualifications and experience. An RM must have a credit industry qualification to a least the Certificate IV level (eg Certificate IV in Credit Management) or another general higher level qualification in a relevant discipline (eg Bachelor of Accounting). However, if you are going to be providing third party home loan assistance, the RMs will need at least a Certificate IV in Finance and Mortgage Broking. As well as qualifications, the RMs will need at least two years problem-free experience which is relevant to the credit activities you will be engaging in. Preferably the RM will have obtained that experience working for another licensee in a similar business or will have been a credit representative.
The application
Do it yourself or get the professionals in? After making the decision to apply for your own the ACL the next question is will you make the application yourself or hire a consultant. This decision will be based on a number of factors including time, cost and comfort. The thought of drafting an application and interacting with ASIC can be quite daunting, particularly if you have not done so before. Many licensees get professional help when applying but many have also successfully applied for a licence without help. ASIC’s RG204 Applying for and varying a credit licence is worth a read when making this decision.
ASIC requires a lot of information about your business and what you are proposing to do. That information is provided in the application form and several supporting documents. ASIC may request clarification or further information during its assessment.
It is a requirement to have documented compliance procedures. These procedures require a lot of detail and can be very time consuming. If you decide to complete the application yourself, we suggest that you consider purchasing a compliance manual from a consultant to tailor to your business. It saves time and gives you piece of mind that you haven’t missed anything.
Before ASIC issues a licence, you will need to be a member of an external dispute resolution scheme and have professional indemnity insurance in place. Ensure that your policy meets the minimum requirements detailed in ASIC’s RG210 Compensation and insurance arrangements for credit licensees. Applications are quite often delayed because the applicant has to amend its policy.
In our experience, it generally takes one to three months from beginning an application to ASIC making a decision whether or not to issue the licence.
Option 2: Credit Representative
Becoming a credit representative of a credit licensee is another option that can be taken if you want to provide credit assistance to clients.
Interested in expanding your business to provide credit assistance to clients? Being a credit representative allows you to test the waters and get a feel for what’s involved without having to use the same amount of resources, economic and human, as a licensee. Your licensee is ultimately responsible for your compliance with the credit laws and may provide you with compliance procedures to follow and an approved product list.
Eventually want your own licence but no one in the business has credit experience? Becoming a credit representative allows you to provide credit assistance and accumulate experience that can be used to meet ASIC’s responsible manager requirements.
We have mentioned some of the positive aspects of becoming a credit representative. There are some aspects that may not suit everyone. As a licensee is responsible for its credit representatives actions, it may restrict the products that you can recommend and dictate how you conduct that part of your business. There is also a cost involved which may be a flat monthly rate, a percentage of your revenue from credit assistance or a combination of the two.
Being a credit representative might be likened to being a grandparent. You get to be involved, with less responsibility, and you don’t have to worry about it over the weekend.
Option 3: Relying on the referral exemption
There are two exemptions to being authorised under a ACL or holding an ACL which will allow you to refer clients to a licensee. A basic exemption and an expanded exemption.
The basic exemption allows you to provide your client with information about how they can contact a licensee that is able to provide credit activities; for example, a finance broker or a credit provider. At the same time, you must disclose to the client any benefits that you may receive from the licensee for making the referral. This is fairly straight forward and you may be already doing this.
The expanded exemption allows you to pass on your client’s contact details to a licensee. To do this you are required to do the following:
- Have an agreement in place between you and the licensee;
- Have the client’s consent to have their name and contact details provided to the licensee;
- Provide the licensee with the client’s name and contact details within 5 business days;
- Disclose to the client any benefits that you may receive from the licensee for making the referral; and
- Not charge the client a fee for the referral.
- You cannot rely on the expanded exemption if your principal business is referrals. There are additional obligations on the licensee when the expanded exemption is used.
Option 4: Avoid providing credit assistance
After doing a bit of research you may decide that credit assistance is not something that your business is interested in. Here are some tips to avoid unintentionally being caught by the licensing regime.
Keep any discussions about credit generic. Yes, you can talk about the benefits and disadvantages of a class of credit product. Avoid talking about any particular credit provider. Do not mention particular credit products. If you start telling your client that a particular bank’s home loan would be great for them (or they should retain that particular product), you have crossed the line and need to be operating under a credit licence.
If a client comes to you for help filling out an application for a loan for an investment property, politely decline and refer them to a broker or the credit provider. Although it is called credit assistance it is easy to focus on the advice aspect and forget that assisting someone to apply for credit is also caught.
As soon as any client starts mentioning credit, stop them and say “I can’t help you with that but I know a great broker who can. Can I give you their details?” Immediately referring your client to someone who is authorised to provide credit assistance keeps you out of trouble and ensures that your client will get help from someone who knows what they are talking about.
In your Statement of Advice, state that your advice does not involve any suggestion that they enter into, remain in or increase the credit limit of a particular credit contract with a particular credit provider. If assistance is required in any such matters, they should seek assistance from an appropriately licensed or authorised person.
A final word
From time to time we see licensing requirements driving an organisation’s business model. This seems to us to be the wrong way around. Surely, it is better to identify business goals and develop strategies to achieve those goals. These strategies will include consideration as to whether an ACL is necessary, desirable or both.
Michelle Chasser is a lawyer with Holley Nethercote Lawyers.
AUTHOR
Staff Writer
Recommended for you
When entering paid employment, it’s not long before we are told that we’ll need to lodge a tax return but there are times when a person will be excepted.
Anna Mirzoyan examines how grandfathering affects income support payments and how factors such as paying for aged care can impact them.
There are specific requirements that only apply to trustees of self-managed superannuation funds, writes Tim Howard, including the allocation in their investment strategy.
Investments bonds offer a number of flexible, tax-advantaged benefits, writes Emma Sakellaris, but these are often overlooked as old fashioned when it comes to portfolio allocations.
