Financial Services Licensing

Chapter 7 of the Corporations Act regulates financial markets and services. Providers of financial services are required to hold an Australian Financial Services Licence (AFSL) issued by ASIC or to be authorised representatives of an AFSL. A person provides a financial service if they provide financial product advice, deal in a financial product, make a market for a financial product, operate a registered scheme or provide a custodial or depository service.

Credit ratings agencies and providers of margin lending facilities are also required to hold AFSLs. Each financial services business is subject to its own set of specific licence conditions.

Certain exemptions from holding an AFSL are available, for example:

  • in relation to financial services only involving the financial services provider itself, such as a company issuing shares; and
  • where the financial service is regulated by an approved overseas (ie non-Australian) regulatory authority.

The definitions and rules for determining whether a particular person or activity is required to hold an AFSL, or whether an exemption applies, are relatively complex and need to be assessed on a case by case basis.

Holders of an AFSL can be subject to licence conditions such as being limited to offering financial services only to wholesale clients. An AFSL for the carrying on of one kind of financial services business will not authorise the licence-holder to carry on another kind of financial services business. There are also a range of financial and operational requirements imposed on AFSL holders as conditions of their licences.

Financial Products

The definition of "financial products" is critical to determining whether the regulatory regime under the Corporations Act applies. The concept is defined broadly to mean a facility through which a person:

  1. makes a financial investment, where an investor gives money to another person to generate a financial return for the investor and the investor has no day-to-day control over the money, e.g. shares and options;
  2. manages a financial risk, where a person manages the financial consequence of particular circumstances happening or avoids or limits the financial consequences of fluctuations in, or in the value of, receipts or costs (including prices and interest rates), e.g. insurance products; or
  3. makes non-cash payments, where a person makes payments or causes payments to be made otherwise than by the physical delivery of Australian or foreign currency in the form of notes and/or coins, e.g. through card payment systems.

Offering a financial product to a retail investor will normally require the preparation of a product disclosure statement or a prospectus, and potentially also the provision of a financial services guide. The form and content of both types of documents are prescribed by the Corporations Act.

Anti-Money Laundering

The Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (Cth) is the main statute dealing with anti-money laundering and terrorism financing and is administered by the Australian Transaction Reports and Analysis Centre (AUSTRAC). Entities covered by the legislation include businesses in the financial, bullion and gambling sectors. These entities are required to:

  1. conduct risk assessments and implement system and governance arrangements to manage money laundering and terrorism financing risks;
  2. verify the identity of their customers (e.g. "know your client" checks) and keep adequate records;
  3. advise AUSTRAC if they have obligations under the legislation; and
  4. report certain cash and international transactions and any suspicious activity to AUSTRAC.

National Consumer Credit Licensing

The National Consumer Credit Protection Act 2009 (Cth) (NCCPA) sets out, amongst other things, a comprehensive licensing regime for all providers of consumer credit and credit services and imposes responsible lending conduct requirements on licensees.

In broad terms, the NCCPA requires two broad categories of people engaged in consumer credit activities to be licensed:

  1. credit providers (i.e. lenders and lessors); and
  2. providers of credit services, including intermediaries such as finance brokers.

The provision of credit to consumers for residential investment purposes also falls under the NCCPA.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.