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Achieving an Australian Financial Services Licence may not be as onerous as it seems. While the application process is rigorous, there are many advantages to pursuing this path.
Many financial planning firms will at some point consider whether applying for an Australian Financial Services Licence (AFSL) is a potential future path for the business. While the right way forward will differ for every practice, it’s worth understanding what the application process involves
for planners to be able to make the right decision for their businesses.
Four FPA members describe the journey they went on to achieve their AFSL.
“I wanted to be able to operate in line with my interpretation of our requirements as professional advisers compared to a larger dealer group. It’s also extremely difficult to provide independent advice without your own licence.”
Rees-Evans was awarded his licence in July 2012, and he started the process of applying for it in June that year. He says the key to getting a licence is to be able to demonstrate to ASIC the business has the right processes to be able to discharge its obligations as a licensee.
“You need to demonstrate or explain how you are competent to provide advice. You need to show that you’re qualified. You will need to describe your business, outline the financial services and products you provide and estimate your income from those activities. You also need to explain how you’re going to grow, how you’ll deliver services, where you operate from, what services you’re going to outsource and to whom, how often they’ll review that service and an organisational chart,” he explains.
Rees-Evans gives advice on margin lending and managed discretionary accounts (MDAs) and so he had to provide more details on these aspects of his business to achieve the licence.
“ASIC wants to know about how you’re going to control risk. So for margin lending, they ask about your recommendations for loan-to-value ratios and how you structure margin loans.”
He also explains financial adequacy is something with which ASIC is concerned with and there’s different ways to demonstrate this. A common approach for small licensees is the 90-day cash flow rule, which means the business must have enough cash to meet 90 days of cash flow requirements. ASIC also wants potential licensees to provide information about who will audit the business, how it will monitor compliance with cash flow needs and how records will be kept.
Rees-Evans’ advice for other businesses looking to receive an AFSL is not to be put off by a perception that it’s too expensive, complicated and risky.
He says the cost to establish an AFSL is around $2,000 and the set-up process took about eight hours of his time. He received advice and support from SMART Compliance, which took care of much of the paperwork. Professional indemnity insurance is another expense. The cost will be different for each practice, but expect to pay at least $10,000 for this.
Brett Walker, managing director of SMART Compliance says it’s important to have the right
documentation to prove you have appropriate qualifications to ASIC. “Without that you’re going to have trouble convincing ASIC of your aptitude to be a responsible manager.”
He says advisers need to think carefully about the type of business they want to operate before lodging an application and prepare appropriate information about the financial health of the business, including balance sheets and cash flow forecasts.
Trent Alexander CFP®, principal of Financial Planning Expert, has had an AFSL for six years. He says he regrets not getting his licence earlier.
“It was tough at the start because we had to build up the client base. After the first couple of years we got good traction and we haven’t looked back,” he explains.
Alexander took 12 months to plan for his application, and received external advice about how to successfully apply.
In terms of getting help, he initially explored his options with a lawyer.
“I had preliminary meetings with a couple of firms but the fees were too high. I remember being quoted $20,000 just to have them review the application that I had done. I very quickly knocked that on the head and decided to look elsewhere.”
Alexander decided to appoint a firm that specialises is helping planners achieve their AFSL, AFSL Compliance.
“Their process was end-to-end. They handled the entire application. The only exception to that was probably half a day’s work gathering and clarifying information, but they did all of the legwork. After the application was submitted I had the licence within 14 days.”
Aside from working with experts, Alexander’s other recommendation is not to be afraid to apply for an AFSL. “Once you get the initial set-up done and the licence in place, running it is actually less hassle in terms of compliance than working with the larger dealer groups.”
Natural next step
Dacian Moses CFP®, principal of Waterfall Way Associates, saw an AFSL as a natural progression of his career in financial planning over the last 20 years. He received his licence in 2006.
“Owning your own AFSL is the ultimate expression of control and independence. This was a view shared by my previous licensee, Ray Griffin, who actively supported my professional development and my AFSL application,” he explains.
He says the starting point for anyone wanting to get an AFSL is ASIC’s AFSL licensing kit.
“Have a clear picture of how your business will operate and meet the various obligations of being a licensee. Putting together the proof documents to support your application is a very bureaucratic process, but the business principles that underpin the process are sound” Moses says.
His advice to other firms that want an AFSL is to firstly know why you want to have your own licence. “Build compliance into daily business practices instead of overlaying a compliance structure afterwards. Pay heed to the FPA Code of Professional Practice and seek out advisers who have done it before.”
Mira Macura, head of finance and operations, Stanford Brown, decided to pursue an AFSL because she wanted the freedom to choose her own future, and the ability to better manage clients’ best interests.
“Having an AFSL provides us with the ability to move quickly on opportunities like robo advice,” she explains.
Macura set up a team to manage various aspects of the AFSL project including operations such as IT, marketing and re-branding, professional indemnity insurance, brokerage and external services providers, compliance and corporate governance, advice and documentation, approved products list, media and client announcements.
“The initial process was about ensuring we had all the right people in place, and formalising various roles and committees to satisfy ASIC requirements.”
This also involved setting up compliance policies and procedures and a risk management framework, as well as determining which functions would be done in-house and what would be outsourced.
“This involved undertaking an extensive due diligence process to select our outsourcing partners for the journey ahead,” she explains.
According to Macura, the main challenge was determining the legal requirements of changing the licence. “As a matter of best practice, it was agreed that all clients on an active, ongoing service agreement would be provided with a foundation statement of advice (SOA) at their next review. This required careful planning of administration and paraplanning resources.
“While this caused great strain on resources in the short term, the planning and management of this aspect of the AFSL project resulted in a tremendous achievement where almost all clients have received a foundation SOA within 12 months of licence transition,” she explains.
For firms with the right scale, she suggests hiring a compliance officer and engaging with an external compliance and corporate governance expert to ensure there is adequate support for the technical and compliance team.
“Gaining an AFSL is not as easy as it sounds. It’s a significant undertaking. Ensure you have a robust project plan in place and a competent team managing the transition to your own licence. Be prepared to spend a lot of time and money on your compliance obligations,” says Macura.
“It’s also important to know your numbers. The brokerage transition process is by far the most critical. It can take between two weeks and two months for fund managers and life insurance companies to transfer business. Fortunately, due to months of preparation in this area, we were well equipped in advance of the transition,” she adds.
Her advice is to engage a really good specialist lawyer and compliance adviser, and outsource as much as possible to external parties. “It’s all worth it when you come out the other side.”
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