Limited AFS License application catch 22

Limited AFS License application catch 22

Accountants are still being encouraged to apply for limited Australian Financial Services Licence despite an existing backlog and further delays expected as funding runs out.

Limited Australian Financial Services Licence (limited AFSL) applicants are likely to face continued licensing delays. That is the message delivered in the Australian Securities and Investment Commission’s (ASIC) latest licensing report; Report 503 Overview of licensing and professional registration applications: Jan to Jun 2016 (Report 503).

The delay will not only be frustrating for accountants looking to be licensed, but will also be a disappointment for their clients who wish to continue working with their accountants to develop their ongoing financial plans.

ASIC’s target is to assess all AFSL applications that were lodged prior to 30 June 2016 before 31 March 2017. However, this is subject to constraints. ASIC signalled an intention to keep Limited AFSL applicants up-to-date with their progress and will provide an update every three months.

While the delays are causing frustration for limited AFSL applicants, potential licensees are urged to remain patient and cautious while they await the outcome of their application. ASIC will most certainly take a very dim view of any accountant who acts in anticipation of a limited AFSL being granted and who is found to be providing financial services that they are not yet authorised to.

Why the delays?

From 1 July 2016, accountants were required to hold a limited AFSL, or become an Authorised Representative of an existing limited AFSL holder, to be able to provide advice relating to acquiring or disposing of an interest in a Self-Managed Superannuation Fund (SMSF) or provide ‘class of product’ advice on a select variety of financial products.

Report 503 states that the transitional funding ASIC received from the Australian government to assist with the implementation of the licensing changes (i.e. the requirement to hold a limited AFSL) lapsed on 30 June 2016. At present, there is a significant number of pending limited AFSL applications still to be assessed by ASIC with the regulator reporting, “Because the transitional period funding has now elapsed, we will assess these limited AFS licence applications out of our existing ongoing resources.” As many existing AFSL applicants will know, the licensing capacity of ASIC was already strained prior to the end of the transitional period for accountants.

The new licensing requirements for limited AFSL applicants included a three-year transition period, ending on 1 July 2016. During this period, ASIC reports (through Report 503) that it received 899 applications for an AFSL or a limited AFSL. Of the applications received, 203 were approved, 39 were withdrawn, 82 were refused and 617 applications were still pending.

To address the significant number of pending applications for limited AFSL holders, a small number of ASIC staff have been reassigned to assist in the assessment of the pending applications. These staff will focus specifically on the limited AFSL applications generated by the new rules around licensing for accountants.

The additional workload without additional funding will result in continuing significant delays for all AFSL applicants. ASIC advised that all AFSL applicants were likely to be affected by the delays stating, “this current backlog is also affecting the level of service we can provide in the near term to other licence and professional registration applicants.”

How will the limited AFSL benefit clients?

The broader services that can be offered under a limited AFSL will be beneficial to clients who, having formed a relationship of trust and confidence with their accountant, will be able to generate a more comprehensive financial plan without having to engage other professionals. This will be particularly true for clients who have a wide range of investments and financial interests.

When considering whether to apply for a limited AFSL, it is important to consider not only the type of services you currently provide but also the type of services you would like to be able to provide in the future, and the types of client you would like to be able to work with. An even greater consideration will be the types of advice and services your clients will expect you to be able to provide them. Continuing to broaden your firm’s skill set is critical if you are to stay competitive in a financial services market that is constantly evolving. There is no doubt that the traditional role of an accountant has already moved far beyond what would have been contemplated a few short years ago. We can only anticipate that the reliance clients place on their accountants for a variety of advice will continue to grow.

What is a limited AFSL?

Despite the delays, accountants are still encouraged to apply to ASIC for a limited AFSL. Accountants who receive appropriate guidance throughout the application process will find that the benefits of having a limited AFSL is likely to outweigh the costs incurred in obtaining one.

Once granted, a limited AFSL will allow an accountant to give advice beyond the scope of regular taxation and accounting advice. The limited AFSL therefore has the potential to expand a firm’s client base as well as the services that can be offered to new and existing clients.

In particular, a limited AFSL will allow the accountant to:

1. Provide advice in relation to self-managed superannuation funds;

2. Provide ‘class of product advice’ on a range of financial products which includes securities, superannuation, general or life risk insurance, simple managed investment schemes and basic deposit products; and/or

3. Be authorised to arrange to deal in an interest in a self-managed superannuation fund, for example to establish a SMSF on behalf of another person.

Limited AFSL holders must be careful to only provide ‘class of product advice’ when advising on the select group of financial products outlined above. It is critical to be informed about the authorisations on the limited AFSL and the corresponding type of advice or information the limited AFSL holder is permitted to give. Limited AFSL holders are urged to put comprehensive procedures in place to ensure that advice or financial services outside the scope of these authorisations is not provided to clients.

Distinction between ‘class of product advice’ and ‘general’ or ‘personal’ advice

Class of product advice is financial product advice about a type of product, whereas general or personal advice will include a recommendation about a specific product within the class. This means a limited licensee can advise on various investment tools available to the client but not recommend a particular scheme, account or provider. An example of the distinction as provided by Treasury is that the limited licensee may provide advice on the types of basic deposit product that would be appropriate for, and in the best interests of, a client saving for a home deposit, for example term deposits or online savings accounts. However, the limited licensee cannot recommend a specific term deposit scheme or particular online savings account for the client to invest their money into. A limited licensee will be able to provide strategic investment advice but may not provide specific investment advice where they recommend named investments.

Providing financial services beyond the authorisations on the limited AFSL is a breach of the licence and is reportable to ASIC. ASIC will determine, based on the severity of the breach and the likely effect on clients, whether they wish to take further action. ASIC takes a very tough stance on breaches relating to AFSL holders acting outside the scope of their authorisations. Breaches of this nature will generally lead to the suspension or cancellation of the AFSL. Limited AFSL holders should conduct comprehensive training for employees to familiarise all advisors with the types of advice that can be given to a client.

Where to from here?

An application for a limited AFSL is just one of the options available to accountants under the new regime. Accountants could also consider becoming an Authorised Representative of another AFSL or even apply for a full AFSL. Both of these options will have merits and drawbacks and the firm’s future intended business operations should be paramount when deciding on how to proceed.

Limited AFS License application catch 22
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