What is an AFSL Responsible Manager? Understanding Their Role and Requirements

Introduction

Responsible managers (RMs) are a critical component of the Australian Financial Services licensing regime. They are the individuals nominated by Australian Financial Services Licence (AFSL) holders to demonstrate to ASIC that the licensee has the knowledge, skills and experience required to provide the financial services covered by their licence.

The role of RMs is not explicitly defined in the Corporations Act 2001 (Cth), but rather is a creation of ASIC used to assess a licensee’s organisational competence. This article will delve into what it means to be a RM, exploring their key responsibilities, the requirements they must meet, and the process for appointing and changing RMs.

Understanding the Role of a Responsible Manager

Definition and Purpose

A RM is integral to demonstrating the organisational competence of an Australian Financial Services Licence (AFSL) holder. RMs are appointed to showcase that the licensee can provide financial services efficiently, honestly, and fairly. Their expertise is essential for:

• New AFSL applications: Establishing the licensee’s capability to provide services.
• Variations to existing licenses: For example, when adding new financial products or services.
• Ongoing compliance: Ensuring the licensee continues to meet ASIC’s regulatory standards.

Direct Responsibility Requirements

RMs must have direct responsibility for significant day-to-day decisions related to financial services, such as:

• Determining service delivery: How financial services are provided.
• Supervising provision: Overseeing service quality and regulatory compliance.

The level of involvement varies depending on the size and structure of the business:

• Small advisory firms: Directors often act as RMs due to their hands-on involvement.
• Larger organisations: Responsibility may fall to middle or executive management roles.

Certain roles, such as compliance managers or financial controllers, generally lack the direct responsibility required for RMs.

In heavily automated businesses with fewer than 1,000 retail clients, the RM’s role may involve:

• Regular sign-offs on processes, systems, and service quality.
• Remaining available to address issues and oversee compliance when needed.

Even in these cases, a nominated director involved in daily operations must ensure the RM is consulted appropriately.

Organisational Competence

ASIC assesses the competence of a licensee based on the collective expertise of its RMs. The RMs must demonstrate sufficient knowledge and skills to cover all authorised services and products. Examples include:

• Specialised RMs: A licensee dealing in life and general insurance may have:
  • One RM specialising in life insurance.
  • Another focusing on general insurance.
• Multi-skilled RMs: Alternatively, one RM could oversee advising on both insurance types, while another manages dealing in both.

For businesses managing schemes or CCIVs, RMs must have:

• Operational expertise: Knowledge of scheme operations.
• Investment expertise: Understanding of financial asset investments.

For instance, a scheme investing in financial assets might require:

• One RM with experience in scheme operations.
• Another with expertise in financial investments.

Time Commitment and Availability

RMs must allocate sufficient time to their responsibilities. ASIC evaluates whether an RM’s other commitments might hinder their capacity to fulfil their role. Considerations include:

• Multiple appointments: Acting as an RM for several licensees.
• Additional business roles: Balancing other professional obligations.

Excessive commitments can undermine an RM’s ability to meet ASIC’s expectations, jeopardising the licensee’s compliance status.

Key Requirements for Responsible Managers

Knowledge and Skills Requirements

RMs must possess the necessary knowledge and skills to effectively oversee financial services. ASIC Regulatory Guide 105 (RG 105) outlines five pathways to demonstrate this competence:

1. Industry or APRA Standard Compliance: This pathway leverages established industry benchmarks, such as APRA’s Prudential Standards, combined with practical experience, ensuring RMs possess both theoretical and applied knowledge.
2. Individual Assessment: This option involves a structured evaluation process by an authorised assessor, verifying knowledge equivalent to a diploma-level qualification and supplemented by relevant experience, offering a robust demonstration of competence.
3. University Degree and Industry Course: This blended approach combines the foundational knowledge of a relevant university degree with the focused practical training of a targeted industry course, rounded out by relevant experience to bridge academic theory and real-world application.
4. Specific Qualification and Experience: This pathway emphasises specialised expertise, requiring a diploma-level or higher qualification directly related to the specific financial service, such as derivatives or managed investments, complemented by practical experience in the field.
5. Experience-Based Submission: For seasoned professionals with extensive practical experience, this option allows for a comprehensive demonstration of acquired knowledge and skills through a detailed submission to ASIC, even without formal qualifications.

Experience Requirements

ASIC emphasises that practical experience is essential for an RM to fulfil their role effectively. The experience requirements include:

• Direct Responsibility: RMs must have experience in making significant day-to-day decisions about financial service delivery. For example, an RM supervising the provision of investment advice should have firsthand experience managing or guiding similar services.
• Industry-Relevant Roles: Experience in providing or supervising financial services is critical. An RM in a managed investment scheme might have several years managing client portfolios or overseeing fund operations.
• Regulatory Environment Familiarity: Experience in Australia’s regulatory environment, or similar jurisdictions, is key. For example, someone overseeing financial services in a jurisdiction like the UK or Singapore may also qualify if their regulatory frameworks are closely aligned with Australia’s.
• Specialised Asset Management Experience: RMs involved with managed investment schemes or CCIVs must understand specific asset types under management. For instance, if a scheme invests in real estate, an RM might need direct experience managing real estate assets or funds.

These experience requirements ensure RMs are well-equipped to uphold their responsibilities and maintain compliance under the AFSL framework.

Fit and Proper Person Test

To ensure integrity, RMs must pass ASIC’s ‘fit and proper person’ test, which evaluates their character, judgement, and professional history. Key criteria include:

• Good Character and Integrity: RMs must demonstrate honesty and diligence, supported by clear criminal history and bankruptcy checks within the past 12 months. For instance, someone with a record of financial misconduct or fraud would not qualify.
• No Conflicts of Interest: RMs must avoid conflicts that could impair their ability to perform their duties. For example, an RM who is a director in competing businesses may not meet the criteria.
• Limited AFSL Affiliations: ASIC limits an RM to associations with one other AFSL to ensure they can dedicate sufficient time to their responsibilities.
• References: Candidates must provide at least two business references attesting to their character and professional experience. For instance, a former employer or colleague might highlight the RM’s role in overseeing financial services.

By meeting these stringent requirements, RMs ensure their businesses maintain organisational competence, comply with ASIC regulations, and deliver financial services efficiently and ethically.

The Five Options for Demonstrating Competence

As outlined in the previous section, RMs can demonstrate their competence through five distinct pathways. Let’s explore each of the five pathways in more detail, providing a clearer understanding of the requirements for demonstrating competence as an RM.

Option 1 – Industry Standard

RMs can demonstrate competence by meeting a widely recognised industry standard or a standard set by the Australian Prudential Regulation Authority (APRA). To qualify, the RM must also have three years of relevant experience within the past five years.

Key aspects of this option include:

• Industry Standards: These must be endorsed by a recognised industry body, developed with industry input, and widely accepted as addressing the required competencies.
• APRA Standards: For APRA-regulated bodies, meeting APRA’s “fit and proper” standard (e.g., CPS 520) demonstrates the necessary knowledge and skills.

This option is suitable for RMs working in sectors where industry or APRA benchmarks are established and respected.

Option 2 – Individual Assessment

An RM can opt for an individual assessment by an authorised assessor to demonstrate knowledge equivalent to a diploma-level qualification. This path is ideal for experienced professionals who may lack formal qualifications.

• Assessment Methods: The evaluation can involve oral tests, practical demonstrations, on-the-job assessments, or other methods tailored to the RM’s role.
• Experience Requirement: Five years of relevant experience within the past eight years is necessary.

Although ASIC’s Training Register (valid until September 24, 2012) provides examples of assessors, it does not offer a comprehensive list. This option ensures that experienced RMs can validate their knowledge without needing traditional academic credentials.

Option 3 – University Degree

A university degree in a relevant field, combined with a short industry course, can demonstrate an RM’s competence. To qualify, the RM must also have three years of relevant experience within the past five years.

This option includes:

• Degree Requirements: Preferably in financial disciplines like economics, commerce, or accounting. Degrees in technical fields may also be acceptable if they relate to the RM’s responsibilities.
• Industry Course: A short course addressing knowledge gaps not covered by the degree. Examples include courses listed on the ASIC Training Register or approved under the Australian Qualifications Framework.

This pathway is common for RMs with strong academic foundations but who need specialised training to address role-specific requirements.

Option 4 – Industry Qualification

RMs can demonstrate competence through an industry or product-specific qualification equivalent to a diploma or higher, combined with three years of relevant experience within the past five years.

Key details include:

• Recognised Qualifications: Examples include the Diploma or Advanced Diploma of Financial Services and the Diploma of Financial Markets (FINSIA), provided they align with the RM’s role.
• Specialised Roles: For registered schemes or Corporate Collective Investment Vehicles (CCIVs), asset-specific qualifications outlined in RG 105.75 are required.

Unlike Option 2, this option requires formal qualifications in industry-specific areas, ensuring expertise directly relevant to the financial services being provided.

Option 5 – Alternative Demonstration

When an RM does not meet the criteria for Options 1-4, they can submit a written explanation to ASIC demonstrating their competence. This option is more flexible but requires a detailed and well-supported submission.

• Submission Requirements: Include the RM’s role, qualifications, experience over the past 10 years, professional memberships, and reasons why their knowledge and skills meet ASIC standards.
• ASIC Discretion: Acceptance is case-specific, based on the RM’s experience and alignment with the sought authorisations. Regulatory Guide 105 (RG 105.78-105.81) provides examples of when this option may or may not be accepted.

This option caters to seasoned professionals with unconventional pathways to competence, offering a way to validate their expertise under unique circumstances.

Ongoing Obligations and Responsibilities

Maintaining Competence

ASIC Regulatory Guide 105 (RG 105) emphasises that AFSL holders must ensure their RMs continually “maintain and update the knowledge and skills” relevant to their roles (RG 105.10). This ongoing requirement applies to the financial services provided and the associated products.

Key considerations for maintaining competence include:

• Regulatory Knowledge: ASIC values RMs’ understanding of the Australian regulatory environment or comparable overseas regimes.
• Practical Experience: Ongoing practical experience in relevant financial services is crucial for RMs to meet ASIC’s standards.
• Professional Development Plans: Developing tailored plans for each RM to outline how they will maintain and update their skills and knowledge is strongly recommended.

Examples of professional development activities include:

• Regular attendance at compliance committee meetings featuring regulatory updates.
• Annual training for RMs to stay updated on compliance standards.
• Reviewing industry publications and attending industry events.
• Completing ongoing RG 146 training or meeting Financial Adviser Standards and Ethics Authority (FASEA) training standards for those providing personal advice to retail clients on financial products.

Ongoing training should focus on both regulatory updates and practical aspects of the financial services and products the RM oversees, ensuring comprehensive and current expertise.

Documentation Requirements

To demonstrate compliance with ASIC’s requirements, AFSL holders must document the measures taken to maintain organisational competence. While RG 105 does not prescribe a specific format, having a clear and systematic approach is essential (RG 105.9, RG 105.11).

Essential documentation practices include:

• Competence System: Establishing and maintaining a system to ensure ongoing competence, with regular reviews of organisational and individual capabilities, particularly when there are changes in business activities or RMs.
• Record-Keeping: Maintaining detailed records of:
  • Periodic reviews of organisational competence.
  • Professional development activities for each RM, such as training and industry events attended.
• Responsible Manager Register: This should include:
  • Details of each RM’s knowledge, skills, and the financial services/products they oversee.
  • The specific option under which they were appointed.
• Fit and Proper Checks: Conducting regular criminal history and bankruptcy checks to ensure RMs remain fit and proper for their roles.

By combining a professional development program with comprehensive documentation, AFSL holders can demonstrate a strong commitment to ongoing competence. This robust compliance framework helps satisfy ASIC’s requirements and ensures the effective oversight of financial services.

Conclusion

RMs play a vital role in ensuring AFSL holders maintain their organisational competence and meet their regulatory obligations. Through their direct responsibility for significant day-to-day decisions and demonstrated knowledge and skills, they provide the foundation for a licensee’s ability to deliver financial services efficiently, honestly and fairly.

The role requires individuals who not only possess the appropriate qualifications and experience but also demonstrate ongoing commitment to maintaining their expertise and overseeing the quality of financial services provided. To proactively manage your responsible manager obligations and ensure ongoing compliance, consider reaching out to our team of AFSL lawyers at AFSL House. We offer tailored AFSL compliance & regulatory advice and practical strategies to help AFSL holders navigate the complexities of RM requirements, fostering a culture of compliance and excellence within your financial services business.

Frequently Asked Questions

Disclaimer: All information provided in this article is strictly general in nature and is not intended to be, nor should it be relied upon as, legal advice.