A Guide to Your AFSL General Obligations

Introduction

Holding an Australian Financial Services Licence (AFSL) carries significant responsibilities that are fundamental to operating within the Australian financial services industry. These general obligations are mandated by the Corporations Act 2001 (Cth), with Section 912A outlining the core duties an AFS licensee must uphold to ensure they provide financial services efficiently, honestly, and fairly.

For every AFS licensee, navigating these compliance obligations is essential for lawful operation and to comply with the conditions of your AFSL. This guide serves as a practical resource, providing a detailed breakdown of the key general obligations to help licensees understand and comply with the financial services laws that govern their conduct and operations.

Core Compliance & Risk Management Obligations

Establishing Adequate Risk Management Systems

Under section 912A(1)(h) of the Corporations Act 2001 (Cth), an Australian Financial Services (AFS) licensee must have adequate risk management systems. This obligation is fundamental to ensuring that a financial services business operates effectively and minimises potential harm to consumers and the market.

ASIC’s guidance in Regulatory Guide 104 clarifies that these systems should be tailored to the nature, scale, and complexity of your specific business. An effective risk management system involves a structured and systematic process for handling risks.

We expect your risk management systems will:

• Identify and evaluate the various risks your business faces, with a particular focus on those that could negatively impact consumers or the integrity of the financial market
• Establish and maintain robust controls designed to manage or mitigate the identified risks
• Fully implement these controls across your operations and continuously monitor their effectiveness to ensure they remain adequate

The requirement for adequate risk management systems ensures that you proactively identify potential issues and have measures in place to keep those risks to an acceptable minimum. Your systems will need to adapt as your business develops and your risk profile changes over time.

Managing Conflicts of Interest

An AFS licensee also has a critical obligation under section 912A(1)(a) of the Corporations Act 2001 (Cth) to maintain adequate arrangements for managing conflicts of interest. This requirement addresses situations where the interests of the licensee or its representatives could diverge from those of their clients.

These arrangements must be sufficient to manage conflicts that may arise wholly or partially from the activities undertaken by the AFS licensee or its authorised representatives. The focus is on identifying and controlling conflicts that emerge during the provision of financial services. ASIC provides detailed guidance on this obligation in Regulatory Guide 181.

Organisational Competence & Adequate Resources

Technological & Human Resources

Under section 912A(1)(d) of the Corporations Act 2001 (Cth), an AFS licensee must have adequate technological and human resources to provide the financial services covered by its licence and to carry out its supervisory arrangements. The adequacy of these resources depends on the nature, scale, and complexity of your financial services business.

ASIC’s Regulatory Guide 104 outlines that having sufficient human resources means you have enough people to:

Resource Area	Key Requirements
Human Resources	Having enough people to comply with all legal obligations, effectively carry out monitoring and supervision of representatives, and meet current and anticipated future operational needs.
Technological Resources	Having adequate systems to comply with all legal obligations, maintain client records and data integrity, protect confidential information, and meet operational needs, including security and disaster recovery.

The Role of Competent Responsible Managers

The organisational competence obligation, detailed in section 912A(1)(e) of the Corporations Act 2001 (Cth), requires an AFS licensee to maintain the competence to provide its financial services. ASIC assesses this by examining the knowledge and skills of the individuals nominated as “responsible managers.” These individuals must have direct responsibility for significant day-to-day decisions about the provision of your financial services.

According to ASIC’s Regulatory Guide 105, each responsible manager must demonstrate their knowledge and skills through one of five options:

Option	Requirement Details
Option 1	Meeting a relevant, widely adopted industry standard or a standard set by APRA, combined with three years of relevant experience in the past five years.
Option 2	Being individually assessed by an authorised assessor as having knowledge equivalent to a diploma, combined with five years of relevant experience in the past eight years.
Option 3	Holding a university degree in a relevant discipline, completing a relevant short industry course, and having three years of relevant experience in the past five years.
Option 4	Holding a relevant industry-specific or product-specific qualification equivalent to a diploma or higher, along with three years of relevant experience in the past five years.
Option 5	Providing a written submission to ASIC that demonstrates appropriate knowledge and skills for their role if they do not meet the criteria for the other options.

Monitoring, Supervising & Training Representatives

An AFS licensee has a dual obligation to its representatives under the Corporations Act 2001 (Cth). You must ensure your representatives are adequately trained and competent to provide the authorised financial services, as required by section 912A(1)(f). Additionally, you must take reasonable steps to ensure that your representatives comply with all financial services laws, as stated in section 912A(1)(ca).

To meet these obligations, you need to implement effective monitoring and supervision measures. According to ASIC’s Regulatory Guide 104, these measures should:

• Allow you to determine whether your representatives are complying with the law
• Include robust mechanisms for remedying any breaches

Your supervisory arrangements should cover all representatives, including employees, directors, and authorised representatives.

For representatives who provide financial product advice to retail clients, training must meet the minimum standards outlined in ASIC’s Regulatory Guide 146. This involves ensuring they have the necessary knowledge and skills for the specific products they advise on. Furthermore, you have an obligation to implement policies for continuing training to ensure representatives maintain and update their knowledge and skills.

Financial & Compensation Arrangements

Key Financial Obligations

Under section 912A(1)(d) of the Corporations Act 2001 (Cth), an AFS licensee must meet several financial requirement obligations to ensure it maintains adequate financial resources. These financial obligations are crucial for ensuring a licensee can provide its financial services and carry out its supervisory arrangements effectively.

The specific requirements vary depending on the financial products and services you offer, with detailed guidance provided in ASIC’s Regulatory Guide 166.

All AFS licensees must meet certain base level financial requirements to ensure they can operate a compliant and stable business. These foundational obligations include:

Financial Requirement	Description
The Solvency and Positive Net Assets Requirement	You must be able to pay all your debts as and when they become due and payable. Additionally, your total assets must exceed your total liabilities.
The Cash Needs Requirement	You are required to have sufficient financial resources to meet your anticipated cash flow expenses, typically demonstrated with detailed cash flow projections for at least the next three months.
The Audit Requirement	Your compliance with these financial obligations must be confirmed through an annual AFSL audit, with the report lodged with ASIC.

Your Compensation & Insurance Obligations

Section 912B of the Corporations Act 2001 (Cth) requires any AFS licensee that provides financial services to retail clients to have arrangements in place for compensating them. These arrangements are designed to cover losses or damages that retail clients may suffer due to breaches of Chapter 7 obligations by the licensee or its authorised representatives.

The primary method for meeting this obligation is by holding adequate Professional Indemnity (PI) insurance, as outlined in ASIC’s Regulatory Guide 126.

For PI insurance to be considered “adequate,” it must be appropriate for your business, considering several key factors:

• The nature, scale, and complexity of your financial services business
• The volume of your business operations
• The number and types of clients you serve
• Your potential liability for compensation claims, including those that may arise through the Australian Financial Complaints Authority (AFCA)

Client Conduct, Disclosure, & Dispute Resolution

Conduct & Disclosure Requirements

A cornerstone of your general obligations as an AFS licensee is found in section 912A(1)(a) of the Corporations Act 2001 (Cth). This provision requires you to do all things necessary to ensure that the financial services covered by your AFSL are provided efficiently, honestly, and fairly. This broad, stand-alone duty underpins all other compliance obligations and governs your interactions with clients.

To support this overarching obligation, ASIC provides specific guidance on conduct and disclosure. These rules are designed to ensure transparency and protect retail clients when they are receiving financial advice.

Key regulatory guides that outline these requirements include:

Regulatory Guide	Purpose and Scope
Regulatory Guide 175	Details the specific conduct and disclosure rules that apply when representatives provide financial product advice to retail clients, covering how advice must be prepared and presented.
Regulatory Guide 168	Outlines the requirement to provide a Product Disclosure Statement (PDS) containing sufficient information for a retail client to make an informed decision about acquiring a financial product.

Internal & External Dispute Resolution

Under section 912A(1)(g) of the Corporations Act 2001 (Cth), an AFS licensee that provides financial services to retail clients must have a comprehensive dispute resolution system. This obligation ensures that clients have a clear and accessible pathway to resolve complaints.

The dispute resolution system comprises two distinct stages:

Dispute Resolution Stage	Description
1. Internal Dispute Resolution (IDR)	The licensee must establish and maintain an IDR procedure compliant with ASIC’s Regulatory Guide 271, serving as the first step for handling and resolving retail client complaints directly.
2. External Dispute Resolution (EDR)	If a complaint is not resolved via IDR, clients can escalate it to an EDR scheme. Licensees must hold membership with the Australian Financial Complaints Authority (AFCA), which provides a free and independent forum.

ASIC’s Regulatory Guide 267 outlines how AFCA provides a free, independent, and binding forum for clients to have their complaints heard and resolved.

Notify ASIC of Reportable Situations

What is a Reportable Situation?

Under Section 912D of the Corporations Act 2001 (Cth), an AFS licensee must identify and report on specific issues known as “reportable situations.” These situations are critical for ASIC to monitor compliance and protect consumers within the Australian financial services industry.

A reportable situation arises if one of the following occurs:

Triggering Event	Description
Significant Breach of a Core Obligation	The AFS licensee or its representative has breached a core obligation, and that breach is significant.
Anticipated Significant Breach	The licensee or its representative can no longer comply with a core obligation, and the resulting breach will be significant.
Prolonged Investigation	An investigation into a potential significant breach of a core obligation continues for more than 30 days.
Gross Negligence or Serious Fraud	The licensee or its representative has engaged in conduct constituting gross negligence or has committed serious fraud.

A “core obligation” includes the general duties outlined in sections 912A and 912B of the Corporations Act 2001 (Cth).

A breach of a core obligation is considered “significant” if it meets certain criteria, such as:

Criteria	Description
Criminal Offence	The breach involves an offence punishable by imprisonment of 12 months or more (or 3 months if it involves dishonesty).
Civil Penalty Contravention	The breach is a contravention of a civil penalty provision.
Misleading or Deceptive Conduct	The breach constitutes misleading or deceptive conduct in relation to a financial product or service.
Material Client Loss or Damage	The breach results in, or is likely to result in, material loss or damage to a client.

Other factors, such as the number or frequency of similar breaches and the impact on the licensee’s ability to provide financial services, are also considered when determining if a breach is significant.

The Process for Lodging a Breach Report with ASIC

The obligation to notify ASIC of a reportable situation, a key component of breach reporting by AFS licensees, is detailed in Section 912DAA of the Corporations Act 2001 (Cth). An AFS licensee must lodge a report with ASIC within 30 days of first knowing that there are reasonable grounds to believe a reportable situation has arisen.

This 30-day period begins as soon as the licensee has a reasonable basis for this belief, not after an internal investigation is complete. All reports must be submitted in the prescribed form through the ASIC Regulatory Portal. This process ensures that the regulator is informed in a timely manner, allowing for appropriate oversight and action.

Conclusion

Holding an AFSL requires adherence to a wide range of general obligations under the Corporations Act 2001 (Cth), from maintaining adequate risk management and financial resources to ensuring organisational competence and fair client conduct. These duties also extend to implementing robust dispute resolution systems and notifying ASIC of any reportable situations to uphold compliance and market integrity.

Navigating these extensive requirements demands the specialist knowledge of AFSL lawyers and a proactive approach to compliance. For expert guidance on establishing and maintaining a tailored compliance framework that meets your specific obligations, contact our AFSL compliance lawyers at AFSL House today to ensure your operations are not only compliant but also strategically positioned for success.

Frequently Asked Questions (FAQ)