Guide to AFSL Compliance Health Check for Your Business

Introduction

For Australian Financial Services Licence (AFSL) holders, maintaining ongoing compliance with regulatory obligations is a fundamental requirement for operational integrity. An AFSL compliance health check is a proactive and systematic evaluation of a licensee’s operational framework against the requirements of the Corporations Act 2001 (Cth) and Australian Securities and Investments Commission (ASIC) regulatory guides, designed to identify weaknesses before they escalate.

This guide provides Australian Financial Services Licence (AFSL) holders, particularly compliance officers and managers, with essential information and a structured approach to conduct an effective AFSL compliance health check. It aims to equip licensees with the knowledge to systematically assess their operational framework, ensuring their financial services business meets its ongoing compliance duties and mitigates regulatory risk.

Scoping & Planning Your AFSL Compliance Health Check

Defining the Scope: Tailoring the Health Check to Your Operational Framework

The initial phase in conducting an effective Australian Financial Services Licence (AFSL) compliance health check involves meticulously defining its scope. This critical step ensures the review is focused, efficient, and directly addresses the specific operational framework and risk profile of your financial services business.

A licensee can determine the subject matter and breadth of the review, whether it’s a comprehensive assessment of the entire compliance framework or a targeted examination of particular areas like financial advice, conflict management, or new regulatory obligations.

Several key considerations will help tailor the health check appropriately:

• Nature, Scale, and Complexity of Your Business: Larger, more intricate organisations offering diverse financial products and services will generally necessitate a broader scope compared to smaller, more specialised firms. The volume of business and available resources also play a part.
• AFSL Authorisations and Services Offered: The review must map all your AFSL authorisations against your current business activities, including:
  • Financial products
  • Financial services
  • Client types (retail or wholesale)
  This mapping ensures no unlicensed financial service is being offered and helps prioritise areas based on the specific regulatory requirements tied to your authorisations.
• Risk Profile and Regulatory Priorities: Your organisation’s specific risk profile should heavily influence the scope, including:
  • Previously identified weaknesses
  • Audit findings
  • Areas of concern highlighted by management or the Board
  Focus on high-risk areas such as advice quality, AML/CTF compliance, financial resource adequacy, and conflict of interest management.
• Regulatory Changes and ASIC Focus: Recent or upcoming changes in financial services law, ASIC regulatory guides, or specific areas of ASIC scrutiny (e.g., cyber resilience, design and distribution obligations) may warrant a dedicated focus within the health check.
• Alignment of Advice with Licence Conditions: The scope should verify that financial advice practices align strictly with your AFSL conditions and the genuine needs of your clients, a point of concern for ASIC.

A clearly defined scope makes the health check process more manageable and ensures that the outcomes directly address the issues that prompted the review, aligning the assessment with your organisation’s specific operational context and compliance needs.

Identifying Critical Functions & Components for Your AFSL Licence Assessment

Once the overall scope of your AFSL compliance health check is established, the next crucial step is to identify the critical functions and components within your operational framework that require detailed assessment. This involves a criticality analysis to pinpoint the systems, processes, and personnel that are fundamental to your financial services business and have a significant bearing on your ongoing compliance obligations.

The focus should be on areas that present the highest regulatory risk or could have the most substantial impact on your clients and your AFS licence.

Examples of critical functions and components that often warrant inclusion in an AFSL compliance assessment include:

Critical Function/Component	Description/Focus
Client Onboarding Processes	This encompasses Know Your Customer (KYC) procedures and Anti-Money Laundering/Counter-Terrorism Financing (AML/CTF) checks.
Financial Advice Generation and Delivery	This involves the entire advice process, from needs analysis and product selection to the preparation and delivery of Statements of Advice (SOAs).
Trade Execution and Management Systems	If applicable, this includes systems for executing, clearing, and settling transactions.
Client Money Handling	This covers all procedures related to the handling, reconciliation, and reporting of client money, a key area of ASIC oversight.
Risk Management Frameworks	This includes the systems and processes for identifying, assessing, monitoring, and mitigating risks across the organisation.
Compliance Monitoring Systems	The tools and processes used to monitor adherence to compliance obligations.
Data Governance and Information Security	This involves controls related to the security, privacy, and integrity of client and business data.
Complaint Handling and Dispute Resolution	This includes both internal dispute resolution (IDR) mechanisms and membership with the Australian Financial Complaints Authority (AFCA), if applicable.
Breach Identification and Reporting Processes	The systems for identifying, assessing, and reporting significant breaches to ASIC.

It is important to recognise the interconnectedness of these functions. A deficiency in one area, such as inadequate IT systems, can have cascading effects on other compliance obligations, like data security or the ability to monitor authorised representatives effectively. Therefore, even a targeted review should consider these interdependencies to ensure a thorough assessment.

Allocating Resources & Establishing a Timeline for Your AFSL Compliance Review

Effective planning for your AFSL compliance health check also involves the careful allocation of necessary resources and the establishment of a realistic timeline. This ensures the review can be conducted thoroughly and efficiently, leading to meaningful outcomes for your organisation.

Key aspects of resource allocation and timeline establishment include:

• Forming an Assessment Team: Decide whether the health check will be performed by:
  • Internal staff
  • External compliance consultants
  • A combination of both
  If using internal resources, ensure they possess the necessary expertise in AFSL compliance and can maintain objectivity, especially if reviewing areas they are usually involved in. A cross-functional team might include representatives from legal, risk management, operations, and internal audit. Engaging external consultants can provide an impartial perspective and access to broader industry best practices.
• Budgeting and Personnel Commitment: Allocate an adequate budget to cover all associated costs, including:
  • Personnel time
  • Potential fees for external experts
  • Any technology or tools required for the review
  Sufficient personnel must be available to support the process by providing access to information, participating in interviews, and facilitating process walkthroughs.
• Developing a Realistic Timeline: Establish a clear and achievable timeline for each phase of the health check, including:
  • Initial information requests
  • Document review
  • Staff interviews
  • System testing
  • Analysis
  • Report drafting
  • Remediation planning

The duration of a health check can vary significantly based on its scope and the complexity of your financial services business, potentially ranging from a few days for a targeted review to several weeks for a comprehensive assessment.

The decision to use internal versus external resources is a strategic one. While internal teams have deep knowledge of your organisation, external experts can offer impartiality and identify blind spots. Periodically incorporating external reviews, even alongside more frequent internal checks, can enhance the credibility and robustness of your AFSL compliance oversight. Setting realistic deadlines and ensuring that those involved have adequate time and resources are fundamental to a successful compliance review.

Executing Your AFSL Compliance Health Check: A Methodical Approach

Information Gathering & Evidence Collection for Your AFSL Compliance

A crucial first step in executing your AFSL compliance health check is the systematic gathering of relevant information and evidence. This process forms the foundation for a thorough assessment of your organisation’s adherence to its Australian Financial Services Licence obligations. The objective is to collect comprehensive documentation that provides a clear picture of your existing compliance framework and operational practices.

The types of documentation and evidence to be collected typically include:

Document Type	Purpose/Relevance
Core AFSL Documents	Your AFSL certificate, including all conditions and authorisations, is a primary document.
Compliance Framework Documentation	This encompasses your compliance manuals, specific policies (such as risk management, conflicts of interest, breach reporting, and complaints handling policies), and operational procedure documents.
Organisational Information	Organisational charts, details of responsible managers, and compliance committee meeting minutes provide insight into governance and oversight structures.
Financial Records	Current financial statements, cash flow projections, and documentation related to your financial resources are essential for assessing compliance with financial requirements under your AFS licence.
Client-Related Documents	Sample client files, Financial Services Guides (FSGs), Statements of Advice (SOAs), and Product Disclosure Statements (PDSs) are necessary to review advice quality and disclosure practices.
Registers and Logs	Key registers such as the breach register, complaints register, conflicts of interest register, and staff training records must be reviewed.
Previous Audit Reports	Any existing internal or external audit reports can offer valuable context and highlight previously identified issues.

Beyond document review, evidence collection also involves other methods to understand practical implementation:

• Interviews with Key Personnel: Engaging with responsible managers, compliance officers, staff in operational roles, and financial advisers helps to clarify how documented policies are applied in practice and to gauge the overall compliance culture within the financial services business.
• Observation of Processes: Directly observing key operational processes, such as client onboarding or advice delivery, can reveal how procedures are followed and identify any deviations from documented protocols.
• System Reviews: Examining IT systems, data security measures, and platforms used for providing financial services helps assess the adequacy of technological resources.

This methodical collection ensures that the health check is based on factual evidence, allowing for an accurate assessment of your AFSL compliance status.

Testing the Effectiveness of Your Internal Controls for Regulatory Compliance

Once information has been gathered, the next vital stage in your AFSL compliance health check is to test the effectiveness of your internal controls. It is not enough for a licensee to simply have documented policies and procedures; these controls must be actively functioning as intended to ensure ongoing compliance with financial services law and ASIC regulatory guides.

Testing provides assurance that your internal controls are capable of preventing, detecting, and correcting non-compliance. The process involves several key activities:

• Designing Control Tests: Based on the documented controls and the identified risks, specific tests should be designed to evaluate whether these controls are operating effectively. For example, if a policy dictates a certain approval process for high-risk transactions, testing might involve examining a sample of such transactions to verify approvals were obtained.
• Performing Control Tests: Various methods can be employed to test controls, including:
  • Inquiry: Asking relevant staff how a control is performed and understanding their role in the process.
  • Observation: Watching the control being performed in real-time to see how it functions in the operational environment.
  • Inspection of Evidence: Examining records, system logs, signatures, or reports that provide tangible proof of the control’s operation and effectiveness. For instance, reviewing training logs to confirm that all relevant staff have completed mandatory compliance training.
  • Re-performance: Independently carrying out the control activity to verify that it consistently achieves the desired outcome.
• Evaluating Control Effectiveness: The results of these tests will help determine whether controls are well-designed and consistently applied. This evaluation should consider if the controls are adequate to mitigate the specific compliance risks they are intended to address.
• Identifying Control Weaknesses and Deficiencies: Where testing reveals that controls are not operating effectively, these weaknesses or deficiencies must be documented. This includes identifying whether the issue is a design flaw in the control itself or a failure in its implementation within your organisation.

Identifying and understanding these control weaknesses is fundamental to the AFSL compliance health check, as it allows the licensee to take targeted remedial action to strengthen its regulatory compliance framework and reduce the risk of breaches. This proactive approach is essential for maintaining a robust compliance posture.

Key Areas for Assessment in Your AFSL Compliance Health Check

Reviewing Your Compliance Framework & Governance Structures

A thorough review of your compliance framework and governance structures is fundamental to an effective AFSL compliance health check. This involves examining whether your compliance policies and procedures are well-documented, current, and aligned with regulatory requirements under the Corporations Act 2001 (Cth) and ASIC’s Regulatory Guide 104 (RG 104).

Key considerations include:

• Documentation and Approval: Confirm that compliance measures are formally documented and have been signed off by your governing body or its delegate. This ensures accountability and oversight.
• Monitoring and Review: Assess how your organisation monitors adherence to compliance measures and regularly reviews them to remain effective, especially in response to new products, services, or regulatory changes.
• Compliance Function: Evaluate whether a dedicated compliance function exists, including the appointment of a compliance manager who reports directly to senior management or the board. Check that compliance staff are adequately trained, their responsibilities clearly defined, and they have access to necessary information.
• Communication and Culture: Review how compliance requirements are communicated to staff and whether compliance is integrated into daily operations. Promoting a culture of compliance is crucial for ongoing adherence.
• Responding to Failures: Examine processes for identifying, reporting, and remediating compliance breaches. This includes maintaining a breach register, investigating systemic issues, and preventing recurrence.
• Governance Roles and Reporting: Ensure senior executives or compliance committees have clear roles and provide regular compliance and risk reports to the board, fostering effective oversight.

Evaluating Risk Management Systems & Processes for Your Financial Service

Effective risk management systems are essential to meet AFSL obligations and protect your business and clients. Your health check should focus on the following:

• Risk Management Framework: Verify that your risk management systems are documented, with clear assignment of responsibilities and governance oversight. The governing body should have formally approved the risk management framework and committed to ongoing risk management.
• Risk Identification: Confirm that your organisation systematically identifies risks to the business, consumers, and market integrity. This includes risks arising from new products, technologies, or operational changes.
• Risk Evaluation and Prioritisation: Assess how risks are evaluated by combining probability and impact to determine overall risk levels. Prioritisation should guide which risks require immediate attention.
• Risk Mitigation Controls: Review documented measures and controls designed to address identified risks. These should be appropriate, effective, and regularly updated.
• Incident and Business Continuity Planning: Check for procedures to manage incidents and maintain business continuity, ensuring resilience against operational disruptions.
• Training and Awareness: Ensure staff responsible for risk management are adequately trained and understand their roles.
• Regular Review: Risk management systems should be reviewed at least annually, with external reviews considered to validate effectiveness.

Assessing Human Resources & Representative Oversight for AFSL Compliance

Human resources and representative oversight are critical to maintaining compliance with financial services laws. Your assessment should cover:

• Recruitment and Background Checks: Confirm that representatives and responsible managers undergo appropriate background checks, including identity verification and referee reports, in line with ASIC protocols.
• Training and Competence: Evaluate whether representatives receive initial and ongoing training to maintain the knowledge and skills necessary for their roles. Training records should be maintained and regularly reviewed.
• Monitoring and Supervision: Review the supervisory framework covering all representatives, including those operating remotely. There should be clear reporting lines, and responsible persons must monitor compliance with policies and procedures.
• Record Keeping: Ensure sufficient records are kept of monitoring and supervisory activities, enabling information sharing under ASIC protocols.
• Disciplinary Policies: Check that policies on disciplinary action for compliance failures are documented, communicated, and enforced.
• Succession Planning and Performance Management: Assess whether processes exist for managing staff performance and planning for key personnel changes to maintain operational continuity.

Examining Technological Resources IT Framework & Data Security for Your AFS Licence

Adequate technological resources and a robust IT framework underpin effective compliance and operational efficiency. Your health check should examine:

• IT Strategy and Infrastructure: Verify that an IT strategy supports current and future operational needs. This includes having in-house IT staff or managed service arrangements.
• Disaster Recovery and Data Backup: Confirm the existence of disaster recovery plans, regular testing, and secure offsite data backups to protect against data loss.
• Network Security Controls: Assess measures to prevent unauthorised access, including virus protection, restricted physical access to IT infrastructure, and controls to safeguard confidential and sensitive information.
• Service Level Agreements: If IT services are outsourced, review contracts and service level agreements, including monitoring the delivery of agreed services.
• Compliance Systems Integration: Evaluate the adequacy and integration of compliance management platforms and automation tools that support AFSL obligations, such as breach reporting and transaction monitoring.
• Monitoring Key Indicators: Identify and track indicators that might signal insufficient technological resources, ensuring timely remediation.

Verifying Financial Requirements & Obligations

Financial compliance is a cornerstone of AFSL obligations, ensuring your business remains solvent and capable of meeting its commitments. Your health check should verify:

Requirement	Key Verification Point
Solvency and Net Tangible Assets (NTA)	Confirm that your organisation maintains positive net tangible assets and remains solvent at all times, as required by ASIC’s Regulatory Guide 166 (RG 166).
Cash Flow Projections	Review rolling cash flow forecasts to ensure sufficient liquid resources are available to meet anticipated expenses, including contingency buffers.
Financial Statements and Audits	Check that general purpose financial statements are prepared and audited by qualified auditors, and that ASIC forms FS70 (profit and loss statement and balance sheet), FS71 (auditor’s report), and FS76 (where applicable) are lodged accurately and on time.
Professional Indemnity Insurance	Verify that professional indemnity insurance coverage complies with ASIC’s RG 126 requirements and reflects the current scale and risk profile of your business.
Capital Adequacy for Specific Licensees	For licensees subject to additional capital requirements (e.g., OTC derivative issuers, foreign exchange dealers), ensure compliance with relevant ASIC Market Integrity Rules and RG 166 appendices.
Financial Reporting Compliance	Confirm readiness for financial audits and regulatory reporting, maintaining documentation that supports your financial position and compliance.

Scrutinising Breach Reporting Client Money Handling & Dispute Resolution Mechanisms

Effective management of breaches, client money, and dispute resolution is vital for regulatory compliance and client trust. Your health check should focus on:

• Breach Reporting: Ensure a clear, documented process exists for identifying, assessing, and reporting compliance breaches. Maintain a breach register that records all incidents, their assessment against reportable situation criteria, and remediation actions.
• Timely Reporting to ASIC: Confirm that reportable breaches are reported to ASIC via the Regulatory Portal as soon as practicable, typically within 30 days of becoming aware, with serious breaches reported immediately.
• Incident Management and Remediation: Review procedures for investigating breaches, documenting root causes, affected clients, and corrective measures. Monitor remediation plans to prevent recurrence and identify systemic issues.
• Client Money Handling: Verify that client money and assets are properly segregated from the licensee’s own funds, with documented procedures for reconciliation and reporting in compliance with the Corporations Act 2001 (Cth).
• Dispute Resolution Systems: Assess the adequacy of internal dispute resolution (IDR) procedures, ensuring compliance with ASIC’s RG 271 standards, including accessibility, timeliness, and effectiveness.
• External Dispute Resolution (EDR): Confirm membership in an ASIC-approved external dispute resolution scheme, such as the Australian Financial Complaints Authority (AFCA), especially for licensees dealing with retail clients.
• Compensation Arrangements: Review professional indemnity insurance and other compensation mechanisms to ensure they meet regulatory requirements and provide adequate client protection.
• Training and Awareness: Ensure staff are trained to recognise breaches, handle client money appropriately, and manage disputes effectively.

By systematically assessing these key areas, your AFSL compliance health check will provide a comprehensive evaluation of your operational framework, helping you identify gaps, mitigate risks, and maintain ongoing compliance with ASIC’s regulatory expectations.

Implementing Remediation & Fostering Continuous AFSL Compliance Improvement

Developing & Implementing a Comprehensive Remediation Plan for Your Licence Obligations

Following an Australian Financial Services Licence (AFSL) compliance health check, developing and implementing a robust remediation plan is essential to address identified gaps in your licence obligations. This plan serves as a detailed roadmap to rectify deficiencies and strengthen your overall compliance posture.

The initial step involves prioritising remediation actions based on:

• The severity of the compliance gap
• Potential impact on clients or the financial services business
• Any pressing regulatory imperatives

High-risk issues and significant breaches of financial services law must receive immediate attention.

Once priorities are established, clear responsibilities should be assigned to specific individuals or teams within your organisation. These assignments ensure accountability, while realistic, achievable deadlines should be documented for each action. Furthermore, effective remediation requires allocating adequate resources, including personnel, budget, and necessary technological support.

Implementation of corrective actions can encompass various activities tailored to your specific AFSL compliance health check findings, such as:

Action Type	Example/Details
Policy and Procedure Updates	Revising and updating existing policies, procedures, and compliance manuals to align with current ASIC regulatory guides and the Corporations Act 2001 (Cth).
Internal Control Enhancements	Designing and implementing new internal controls or enhancing existing ones to mitigate identified risks.
Staff Training and Development	Providing targeted training and development for staff, including responsible managers and authorised representatives, to address knowledge gaps.
IT System and Technology Solutions	Reconfiguring IT systems or implementing new technological solutions to improve compliance monitoring.
Addressing Organisational Culture	Addressing organisational cultural factors that may have contributed to non-compliance.
Improving Communication and Reporting Channels	Improving internal communication channels and reporting lines for effective information flow.

Throughout implementation, adhering to sound change management practices is crucial to smoothly integrate remediation efforts into business operations without introducing new risks.

Monitoring Remediation Effectiveness & Ensuring Ongoing AFSL Compliance

After implementing corrective actions, monitoring their effectiveness becomes critical to ensure identified compliance vulnerabilities have been successfully addressed. This involves continuously observing the operational environment to confirm changes are functioning as intended.

Validation of remediation effectiveness can be achieved through several methods:

• Re-testing relevant controls
• Conducting follow-up reviews of affected processes
• Analysing performance data to determine if improvements have been realised

In some instances, particularly if mandated by ASIC as part of an enforceable undertaking or specific licence conditions, an Independent Compliance Expert (ICE) may be engaged to assist with monitoring and validation. Regardless of who performs this function, it’s vital to track progress against the remediation plan, meticulously documenting actions taken and their outcomes.

Regular reports on remediation status should be provided to senior management and the Board to maintain oversight and accountability.

Effective remediation extends beyond fixing isolated problems. The aim is to strengthen underlying systems, processes, and significantly, the organisational culture that allowed these issues to arise. Simply rectifying a specific instance of non-compliance without addressing the flawed process, inadequate training for a financial adviser, or systemic oversight failure means similar issues are likely to recur.

Fostering a Culture of Continuous Compliance & Proactive Management within Your Organisation

An AFSL compliance health check should not be viewed as a one-off event; its findings and subsequent remediation efforts are instrumental in fostering a culture of continuous compliance and proactive risk management. This involves actively embedding the principles of providing financial services “efficiently, honestly, and fairly” into the core values and daily practices of everyone within the financial services business.

Creating an environment where employees feel secure and are encouraged to report compliance concerns, potential breaches, or near-misses without fear of reprisal is vital for:

• Transparency
• Early detection of potential issues
• Building trust within the organisation

The commitment of senior management and the Board is paramount; they must visibly champion and demonstrate strong dedication to ethical conduct and robust AFSL compliance. This “tone at the top” is crucial in shaping organisational culture and ensuring compliance is taken seriously at all levels.

Ongoing, relevant training programs for all staff on their compliance obligations under financial services law, updates to ASIC regulatory guides, and lessons learned from past incidents are essential components of maintaining compliance awareness.

To maintain a strong compliance posture, licensees should:

• Implement a schedule for regular self-assessment activities
• Conduct periodic, more formal compliance health checks
• Review internal policies and procedures at least annually, or more frequently if there are material changes to the business or regulatory landscape

This establishes a “closed loop” compliance system, where findings from health checks, incident reports, and audits directly inform updates to risk assessments, training programs for authorised representatives and responsible managers, operational procedures, and policy documentation. Such a dynamic feedback loop ensures the compliance framework not only addresses past failings but also remains agile and responsive to future and emerging risks, cultivating a learning organisation from a compliance perspective.

Conclusion

Conducting a thorough Australian Financial Services Licence (AFSL) compliance health check involves systematically scoping and planning the review, executing it by gathering evidence and testing controls across key operational areas, and then analysing findings to develop actionable remediation plans. This proactive approach, encompassing everything from governance and risk management to resource adequacy and breach reporting, is crucial for identifying weaknesses and fostering a culture of continuous AFSL compliance improvement within your financial services business.

To ensure your financial services business effectively navigates its ongoing compliance obligations and mitigates regulatory risk, consider leveraging specialised expertise. Contact AFSL House today for trusted guidance and tailored solutions to conduct a comprehensive AFSL compliance health check, helping your organisation in New South Wales turn regulatory challenges into strategic opportunities and achieve peace of mind.

Frequently Asked Questions for Your AFSL Compliance Health Check