We regularly train Responsible Managers ("RMs") of AFS licensees to help them better understand their role. Many RMs are curious to know what they have to do and whether they are personally exposed. To get a handle on these issues, you need to understand the framework in which RMs exist.
Before RMs, there were...
At the beginning of the AFS licensing regime, ASIC referred to RMs as "Responsible Officers". This appears to have been designed to pick up on a provision in section 913B of the Corporations Act 2001 ("the Act") relating to "responsible officers". That section said (and still says) that ASIC must (and may only) grant an AFS licence if "there is no reason to believe that any of the applicant's responsible officers are not of good fame or character".
"Responsible officer" is defined in section 9 of the Act as "in relation to a body corporate that applies for an Australian financial services licence, ... an officer of the body who would perform duties in connection with the holding of the licence."
Section 9 also contains a list of people who are "officers" of a company. This list includes directors, the secretary and people such as a liquidator. It also includes a broad definition, which includes "a person... who makes, or participates in making, decisions that affect the whole, or a substantial part, of the business of the corporation."
ASIC says, in RG 105 Licensing: organisational competence, that it changed the term "responsible officers" to "responsible managers" to reflect the fact that an RM need not meet the definition of "officer" of the licensee.
Nevertheless, we recommend that you hold on to this idea of "officer" and park it at the back of your brain. We will come back to it later.
Why do RMs exist?
If you are an RM, you will be familiar with section 912A of the Act. This section sets out the key obligations of an AFS licensee. Among these, is the obligation to "maintain the competence to provide [the] financial services [covered by the licence]". ASIC, in RG 105, makes it clear that it considers that the way a licensee demonstrates that it is maintaining competence is by having people with appropriate knowledge and skills who manage the financial services business. It says "[w]e refer to these people as your 'responsible managers'."
There is no definition of "responsible manager" in the Act. ASIC has created the concept of RMs in its interpretation of the law. RMs are not themselves a legal concept.
What are RMs?
ASIC sets out in RG 105 what attributes you need to have in order to be appointed as an RM.
- having direct responsibility for significant day-to-day decisions about the ongoing provision of your financial services
- in conjunction with your fellow RMs, collectively having appropriate knowledge and skills for all of the licensee's financial services and products
- being of good fame and character
- individually, meeting one of the five options for demonstrating appropriate knowledge and skills.
These five options are set out in detail in RG 105.
Where the licensee operates a managed investment scheme or provides a custodial service, the RMs must also, between them, have appropriate knowledge and skills in relation to the kinds of asset under management.
ASIC checks, to some degree, whether you have these necessary attributes. This is either done as part of its assessment of a licence application or variation, or when the licensee lodges FS 20 to notify ASIC of the appointment of a new RM. For example, when a licensee appoints an RM, it must provide ASIC with a criminal history check.
If you are an employee of the licensee, your role as RM for the licensee may or may not be specifically set out in your employment contract.
Some licensees are unable to meet the organisational competence obligations from within their own ranks. In this case, a licensee might engage an external contractor to act as RM under the licence.
This will generally be reflected in a contractor agreement.
These kinds of arrangements come under careful scrutiny by ASIC. In particular, ASIC is looking to see that the RM has sufficient responsibility for day-to-day decision making and is not acting as "RM for hire" for too many different licensees.
What do you have to do once you are an RM?
In RG 105, ASIC says that the licensee must "maintain and update the knowledge and skills of its responsible managers".
By this, it means the knowledge and skills relevant to each of the financial services provided by the licensee and the products to which they relate.
We know that ASIC regards the regulatory environment applicable to these services and products as a key aspect of "knowledge and skills". In our experience, when deciding whether to accept the appointment of a person as an RM, ASIC considers experience gained in the Australian regulatory environment and in countries with similar regulatory regimes.
As an RM, you should have a professional development plan setting out how you are going to maintain your knowledge and skills.
Some methods set out in the plan which relate to the regulatory environment might include:
- quarterly attendance at the licensee's compliance committee meeting which includes a regulatory update provided by an appropriately qualified compliance committee member
- annual attendance at RM training run by a compliance service provider or law firm
- reading regulatory updates relevant to the products and services for which you are responsible.
Some methods which relate to commercial or practical aspects of the products and services for which you are responsible might include:
- attendance at industry association events
- reading industry association publications
- if you are RG 146 compliant, ongoing training designed to meet your RG 146 obligations.
Why else does an RM need to know about the licensee's regulatory obligations?
If you are an RM, it means you have a reasonable degree of seniority in the licensee's business.
This means you need to be aware of section 920A of the Act. Section 920A sets out the circumstances in which ASIC can make a banning order against a person. These circumstances include where you:
- have "been involved in the contravention of a financial services law" by your licensee
- are "likely to become involved in the contravention of a financial services law" by your licensee.
The effect of a banning order is that the person against whom it is made is unable to provide financial services for the time specified in the order.
Understanding what the licensee needs to do to comply with its key regulatory obligations may help to protect you from involvement in the contravention of a financial services law by your licensee.
What are the licensee's key regulatory obligations?
In the RM training we provide through Compact compliance and training, we focus on the overarching licensee obligations set out in 912A of the Act. There are 10 of these. For example, a licensee must have in place adequate arrangements for managing conflicts of interest.
Another requirement of section 912A is that the licensee comply with the conditions on the licence. This means you should have access to a copy of your licence conditions and be broadly familiar with them.
The other "big ticket" section of the Act for all AFS licensees is section 912D. This is the section that sets out the licensee's obligation to report significant breaches of the financial services laws to ASIC. As an RM, you need to understand clearly how this section works.
You also need to be familiar with other key AFSL requirements that apply to your particular licensee's day-to-day activities. For example, if your licensee provides personal advice to retail clients, you need to have a broad understanding of the three best interests obligations (including the best interests duty) and the general framework the licensee has in place for meeting these obligations.
Lastly, one of the requirements in section 912A is that the licensee comply with the financial services laws. This includes obvious laws (such as the requirements in Chapter 7 of the Act) but less obvious ones too. It includes "Commonwealth, State or Territory legislation that covers conduct relating to the provision of financial products". This pulls in related regulatory regimes such as anti-money laundering and counter-terrorism financing, and privacy. Your role as RM does not require you to be a quasi-lawyer with strong technical knowledge of these regimes. But you should have a rudimentary understanding of them and how they apply to your licensee.
A brief comment here: the breach reporting requirements under section 912D apply only to a subset of the financial services laws. So, for example, a breach of the anti-money laundering and counter-terrorism financing laws is not a breach for the purposes of section 912D.
Is an RM on the hook?
Your appointment as RM alone does not attract any particular liability for you personally. This is because the concept is not a legal concept. It is a tool that ASIC has created in its guidance to explain how it believes a licensee can demonstrate that it has the organisational competence to provide the financial services (as required by section 912A of the Act).
However, the fact that you have been appointed as an RM raises several other likely possibilities about your role that may expose you.
One is the higher likelihood (discussed above) that any contravention of the law by the licensee could be seen as having your involvement. This risks you receiving a banning order. This is more likely in smaller licensees where there are only one or two RMs.
The other is that, to have the requisite level of involvement in the business to be appointed an RM, you may meet the definition of "officer" under the Act. An officer has various duties under the Act, including the duty set out in section 181, "to act in good faith in the best interests of the corporation". If you make decisions that result in the licensee contravening the law, exposing it to the risk of the loss of its licence, you might be considered not to have acted in the best interests of the corporation.
Many ASIC media releases relating to action taken against RMs relate to situations where the RM was also a director (a director is one type of "officer") of the licensee and ASIC took action on the basis of breach of directors' duties.
Generally, a licensee will have notified ASIC of its proposed RMs at the time it first applied for its licence. It will also notify ASIC of the appointment of new RMs if it applies to vary its licence to add additional authorisations. For each type of application, ASIC will only grant the licence or variation if it is satisfied that the proposed RMs collectively demonstrate organisational competence in relation to all the services and products under the licence.
At other times, if the licensee wishes to appoint further RMs,
it makes the appointment and must then notify ASIC within 10
business days of the appointment, using form FS 20.
The same applies if the licensee is terminating a person's appointment as RM. It must notify ASIC within 10 days of the termination.
If ASIC believes that the licensee is heavily reliant on one or a few RMs for its organisational competence, it will impose a Key Person Condition on the licence.
This condition requires the licensee to notify ASIC in writing within five business days if an RM listed under the Key Person Condition ceases "to be an officer of the licensee or to perform duties on behalf of the licensee with respect to its financial services business". (You will notice that this wording accommodates both the possibility that the RM is an officer and the possibility that they are not.)
The future for RMs
So, what's in the tea leaves for RMs?
In November 2017, ASIC indicated that it was reviewing its regulatory guides in relation to AFS licensing. It said that, as part of this process, it was considering:
- "the need for a key person requirement"
- "the role of a responsible manager and a responsible officer, including in relation to competence and capacity, and good fame and character."
The Report in which it stated this (Report 553 Overview of licensing and professional registration applications: July 2016 to June 2017) was released prior to the announcement of the Royal Commission.
It is possible that time pressures placed on ASIC as a result of the Commission have delayed this review. But be aware that there could ultimately be developments in this space.
ASIC's current banning powers are restricted in the sense that they only enable ASIC to ban a person from providing financial services or holding a licence. This means that ASIC is unable to stop senior managers from moving between licensees if the manager does not themselves provide financial services. For example, if an RM oversees the provision of advice and does not themselves provide advice (or need to provide advice), a ban would not have much practical impact on them (aside from reputational damage associated with the publicity of a ban).
The Government's ASIC Enforcement Review Taskforce recently recommended that ASIC be given powers allowing it to ban a person:
- from performing a specific function in a financial services business
- where ASIC has reason to believe that the person is not fit and proper, or is not adequately trained, to perform their specific role in the financial services business.
The Government has said that it accepts this recommendation. We expect that it will try to legislate to implement it before the end of the Government's current term.
This development will have a big impact on RMs. In particular, you will need to make sure that you are adequately trained to perform your specific role in the financial services business. If you do not do this, you risk being banned from having a managerial role for an AFS licensee.
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.