Applying for an Australian Credit Licence: Top Mistakes to Avoid with ASIC

Introduction

Securing an Australian Credit Licence (ACL) is a critical step for businesses engaging in consumer credit activities, but the application process with the Australian Securities and Investments Commission (ASIC) can be complex. Applicants must demonstrate upfront that they can meet the general conduct obligations outlined in the National Consumer Credit Protection Act 2009 (Cth) from the moment the licence is granted.

Navigating ASIC’s requirements demands thorough preparation and a clear understanding of potential pitfalls. This guide focuses on the common mistakes people make during the application process, offering insights to help prospective licensees avoid delays and successfully secure their ACL.

Mistake 1: Underestimating ASIC’s Requirements and Preparation

Failing to Demonstrate Ability to Meet General Conduct Obligations (Section 47)

A significant mistake when applying for an ACL is failing to adequately demonstrate to ASIC how your business will meet its general conduct obligations under section 47(1) of the National Consumer Credit Protection Act 2009 (Cth) from day one.

These obligations require licensees to engage in credit activities efficiently, honestly, and fairly, among other requirements outlined in ASIC’s Regulatory Guide 205 (RG 205). Applicants must show they can comply with these obligations on an ongoing basis.

ASIC cannot grant a credit licence if it has reason to believe the applicant is likely to contravene these general conduct obligations. Therefore, simply stating an intention to comply is insufficient. Instead, you need to provide concrete evidence within your application showing the arrangements and systems you have planned to ensure future compliance.

Remember, each year during your ASIC licence renewal, you attest that you have processes in place to meet these fundamental obligations.

Lack of Documented Compliance Plans and Procedures

Another common error is submitting an ACL application without comprehensive, documented compliance plans and procedures. Section 47(1)(k) of the National Consumer Credit Protection Act 2009 (Cth) explicitly requires licensees to have adequate arrangements and systems documented in a written plan to ensure compliance with their obligations.

ASIC’s expectations regarding compliance documentation include:

• Full implementation of compliance measures
• Regular monitoring of these measures
• Periodic review of all compliance systems
• Documentation as part of the application process

Failing to provide these documented plans makes it difficult for ASIC to assess your ability to comply and can lead to:

• Delays in processing your application
• Potential refusal of your application

While creating these procedures can be time-consuming, they are a fundamental requirement, and resources like compliance manual templates are available to assist applicants.

Mistake 2: Issues with Responsible Managers (RMs)

Appointing RMs Without Required Qualifications and Experience

A significant challenge when applying for an ACL involves nominating appropriate Responsible Managers (RMs). ASIC will not issue an ACL if the proposed RMs are unsuitable, as they are crucial for demonstrating the applicant’s competence to engage in credit activities.

Common mistakes include nominating individuals who lack the necessary qualifications or experience. ASIC generally requires RMs to possess:

• Specific Qualifications: A credit industry qualification of at least Certificate IV level is typically needed. For instance, a Certificate IV in Credit Management or, if providing third-party home loan assistance, a Certificate IV in Finance and Mortgage Broking is often required. Alternatively, a general higher-level qualification in a relevant field like accounting might suffice.
• Relevant Experience: RMs must usually demonstrate at least two years of problem-free experience directly relevant to the credit activities the business intends to undertake. Experience gained while working for another licensee in a similar capacity or as a credit representative is frequently preferred.

Failing to ensure nominated RMs meet these stringent criteria is a frequent reason for application delays or rejections.

Insufficient Evidence of RM Competence and Ongoing Development Plans

Another common error is failing to adequately demonstrate how nominated RMs will maintain their competence once the licence is granted. It’s not enough for RMs to meet the initial requirements; ASIC expects ongoing capability.

Applicants must show clear plans for maintaining RM competence. This typically involves:

• Ongoing Professional Development: RMs must fulfil Continuing Professional Development (CPD) requirements each year to keep their knowledge and skills current. Failing to ensure RMs complete their CPD is a frequent oversight by licensees.
• Documented Plans: Your compliance documentation should outline the RM’s duties and obligations and detail how their competence will be maintained through ongoing training and development.

Providing insufficient evidence of both the RMs’ current competence and concrete plans for its upkeep can hinder the application process.

Mistake 3: Inadequate Proposed Systems and Resources

Insufficient Risk Management and Compliance Systems Planning

A significant error when applying for an ACL is failing to demonstrate well-developed plans for risk management and compliance systems. ASIC requires applicants to show they have adequate arrangements and systems documented in a written plan to ensure compliance with their obligations under section 47(1) of the National Consumer Credit Protection Act 2009 (Cth) from the outset. This includes having planned for adequate risk management systems as per section 47(1)(l)(ii), unless regulated by the Australian Prudential Regulation Authority (APRA).

These planned systems must be suitable for the specific nature, scale, and complexity of the proposed credit activities. Applicants need to show ASIC they have considered the specific compliance risks their business will face and have outlined a structured process for identifying, evaluating, managing, and monitoring these risks. Simply stating that systems will be developed post-licensing is insufficient; ASIC needs to see evidence of proactive planning before granting the licence.

Not Demonstrating Plans for Adequate Human and Technological Resources

Another common mistake involves not adequately demonstrating plans for the human and technological resources necessary to operate the credit business compliantly. Under section 47(1)(l)(i) of the National Consumer Credit Protection Act 2009 (Cth), applicants (unless APRA-regulated) must show they have planned for adequate resources, including financial, technological, and human resources, to engage in the proposed credit activities and carry out supervisory arrangements.

This requires outlining plans for:

• Human Resources: Sufficient staffing levels to manage operations, compliance, supervision, and anticipated growth. This includes plans for recruitment, induction, training, and performance management.
• Technological Resources: Appropriate IT systems to support the business, maintain client records securely, ensure data integrity, protect confidential information, and meet operational needs. Plans should consider system security, data backups, disaster recovery, and the management of any outsourced IT functions.

Failing to detail these planned resources can lead ASIC to question the applicant’s ability to meet their obligations upon receiving the licence.

Poorly Defined Conflict of Interest Arrangements

Applicants often make the mistake of not presenting clear and adequate arrangements for managing conflicts of interest. Section 47(1)(b) of the National Consumer Credit Protection Act 2009 (Cth) mandates having adequate arrangements to ensure clients are not disadvantaged by any conflict of interest arising from the credit activities of the licensee or its representatives.

ASIC expects applicants to demonstrate documented plans outlining how potential conflicts will be identified, evaluated, managed, and monitored. For instance, if a credit provider offers higher commissions for certain sales volumes, the applicant must show planned procedures to ensure this incentive doesn’t lead to recommending unsuitable products. Failure to provide detailed, documented conflict management strategies is a frequent oversight in ACL applications.

Mistake 4: Errors in the Application Documentation

Incomplete or Incorrect Application Forms and Supporting Documents

Submitting incomplete application forms or improperly prepared supporting documents is a frequent mistake when applying for an ACL. ASIC requires extensive information about your business and its proposed credit activities. This information is gathered through the main application form and various supporting documents.

Failure to provide all necessary information accurately can lead to significant delays, as ASIC may need to request clarification or further details. Therefore, ensuring that all forms are complete and that supporting documents meet ASIC’s requirements is crucial for a smooth application process.

Failing to Secure Compliant PI Insurance and EDR Membership Pre-Approval

Another critical error is not arranging compliant Professional Indemnity (PI) insurance and membership with the Australian Financial Complaints Authority (AFCA) before ASIC is ready to grant the licence. These are mandatory requirements under the general conduct obligations, specifically:

• Section 47(1)(i): Membership with AFCA, the approved external dispute resolution scheme.
• Section 47(1)(j): Compensation arrangements and PI insurance.

ASIC will not issue an ACL until you can demonstrate that you:

• Are a member of AFCA.
• Have PI insurance in place that meets the specific standards outlined in ASIC’s RG 210.

Applications are often delayed because applicants need to amend their PI insurance policy to meet these requirements. Therefore, organising both AFCA membership and compliant PI insurance well in advance is essential to avoid holding up the final approval of your credit licence.

Mistake 5: Not Planning for Ongoing Compliance Activities

Lack of Planning for Ongoing Monitoring, Supervision, and Review

A common mistake when applying for an ACL is focusing intensely on the application itself while neglecting to demonstrate adequate planning for the ongoing compliance activities required once the licence is granted. Holding an ACL necessitates continuous adherence to obligations under the National Consumer Credit Protection Act 2009 (Cth). ASIC expects licensees to have measures in place not just at the application stage, but for the life of the licence.

This oversight typically manifests as a lack of clear plans for crucial ongoing tasks. Applicants must show how they intend to:

• Monitor Compliance: Regularly check that the business and its representatives are adhering to all relevant credit legislation and licence conditions. This goes beyond simple file reviews and includes tracking things like training completion and complaints handling.
• Supervise Representatives: If the business uses credit representatives, there must be a planned system for supervising their activities to ensure they comply with the credit legislation.
• Review Policies and Procedures: Implement a process for periodically reviewing all compliance policies, procedures, and systems to ensure they remain effective, up-to-date with legislative changes, and reflective of the business’s current operations. An annual review is often recommended.

Failing to outline these ongoing processes can lead ASIC to doubt an applicant’s ability to maintain compliance post-licensing. Additionally, keeping records of all monitoring, supervision, and review activities is essential to demonstrate adherence.

Overlooking Requirements for Managing Outsourced Service Providers

Another significant planning mistake involves failing to establish and document processes for managing functions outsourced to third-party providers. Many businesses outsource activities related to their credit licence, such as IT systems, compliance tasks, loan processing, or administrative functions.

While outsourcing is permissible, the ACL holder retains ultimate responsibility for ensuring compliance with all obligations related to the outsourced functions. Applicants must demonstrate they have planned for this responsibility. ASIC expects to see planned measures showing how the licensee will:

• Select Providers: Use due skill and care when choosing suitable service providers.
• Monitor Performance: Implement a system to continuously monitor the performance of outsourced providers to ensure they meet contractual obligations and do not compromise the licensee’s compliance. This includes having current contracts and potentially using checklists for review.
• Address Issues: Have procedures to appropriately deal with any actions by service providers that breach agreements or jeopardise the licensee’s obligations.

Considerations for managing outsourcing should include the provider’s location, the scope of their work, how their work is checked, and how customer privacy and data security are maintained, especially if the provider is overseas. Neglecting to plan for the diligent oversight of outsourced providers is a critical error in an ACL application.

Conclusion

Obtaining an ACL involves navigating complex ASIC requirements and demonstrating the capacity to meet ongoing obligations under the National Consumer Credit Protection Act 2009 (Cth) from the outset. Avoiding common mistakes such as inadequate preparation, issues with RMs, insufficient systems planning, documentation errors, and neglecting ongoing compliance is crucial for a successful application process.

Therefore, thorough preparation and a clear understanding of these potential pitfalls are essential when seeking your ACL. For trusted expertise in navigating the ACL application process and avoiding these common mistakes, contact our team at AFSL House.

Frequently Asked Questions (FAQ)