A choice of licensing options now faces accountants who want to handle SMSF business, so it’s important for them and advisers that they make the appropriate choice, writes Stuart Abley.
With the recent announcement of the removal of the accounting exemption that allowed accountants to open and close an SMSF, and with the introduction of the limited licensing regime for accountants, the time has arrived for accountants to consider their licensing options.
This is an important issue for financial planners who have referral relationships with accountants. It’s important because licensing will enable existing referral work between accountants and planners to continue.
A transition period commenced on the 1 July 2013 and accountants need to decide whether they will apply for a Limited Australian Financial Services Licence or become an Authorised Representative of a Licensee within three years. The transition period closes on 30 June 2016.
One of the biggest issues accountants face is understanding the true impact on their business of the licensing option they choose – what is the real cost of licensing?
Up to now, I feel the licensing debate has only addressed half the equation – the initial costs of securing a licence is on the radar, but there has been little discussion of what is required to maintain it.
The ASIC Regulatory Guide estimates the full cost of obtaining an AFSL to be around $10,000 to $20,000 or potentially higher, based on the identifiable outgoings associated with licence fees and compliance costs.
What has been missing from this conversation is both the time required to maintain the licence, and an understanding of the risk profile of the available choices.
As accountants are faced with decisions around the best way to make the move to an advice-based business, they should be doing so with all the facts at hand.
In making this choice between a limited licence or being an authorised representative of a licensee, the question accountants should ask themselves is: “What is the best licensing choice to help my business capture part of this $500 billion asset base?”
With nearly one million Australians holding assets in an SMSF, a great number of the nation’s 15,000 public practitioner accountants are already advising on the establishment and closure of SMSFs, and understand the value to both their clients and their business that the advice process adds.
As the industry moves through the transitional licensing period, it is imperative that accountants investigate their options for servicing – and attracting – clients requiring SMSF advice.
The limited licence option
The limited licence requires compliance with all financial services laws, while maintaining the competence of employees and ensuring they are adequately trained, having dispute resolution mechanisms in place and adequate compensation arrangements for retail clients, and adequately managing any conflicts of interest that arise.
Licensees will be required to lodge an independent audit or compliance certificate annually.
It is important to note that within three years from the date the limited licence is granted, the licensee will need to demonstrate to ASIC they have the knowledge and experience to provide full financial services.
When evaluating licence options, it is important for accountants to factor in the time required to manage a number of outsourced service providers, keeping in mind this is also time spent away from client work.
Depending on workload this can be one to two hours a week spent liaising with back-end service providers and can be up to 100 hours annually.
The initial application costs of obtaining an AFSL can be minor, which makes it appear to be an attractive ‘easy’ option.
However it is conservatively estimated that the monetary cost of maintaining a licence is well over $30,000 per annum.
This figure includes the cost of ongoing training, CPD requirements, technical support, costs incurred from compliance providers and other service providers, but more importantly lost revenue in time spent undertaking administration such as Future of Financial Advice (FOFA) and licensing requirements and keeping up to date with all financial services regulation.
Authorised representative of a licensee
Becoming an Authorised Representative of a licensee is attractive to many accountants as it eliminates considerable risk and cost from their business model, transferring it to the licensee.
This includes the costs of maintaining the AFSL, compliance, research, technical support, fiduciary duties and legal requirements.
An experienced licensee group will typically offer a range of licensing options to fit most business models.
Most critically for many businesses, by becoming an authorised representative, much of the potential risk is transferred to the licensee, as the licensee is providing the continued maintenance of the obligations under FOFA, FSRA and Corporations law.
The burden of continued compliance updates and support is managed by the licensee. Experienced licensees have an in-depth understanding and experience of managing client complaints with internal processes, managing breach obligations with ASIC guidelines and managing external dispute resolution (EDR) schemes.
Cost should not be the only factor in this very important decision, with resourcing, support and education also important factors to take into account.
The catch cry of being independent and not aligned to any licensee owned by institutions is ill informed – the value of being aligned to an organisation that has a professional well-resourced value proposition in the SMSF market with financial strength can only add value and opportunities for growth.
Stuart Abley is the head of SMSF Advice at AMP.
Originally published on SMSF Essentials.
