Do I Need an Australian Financial Services Licence (AFSL)?

Introduction

Understanding the complex world of financial services regulation in Australia is critical for businesses operating in this sector. One of the most important questions is whether an entity needs to hold an Australian Financial Services Licence (AFSL) to operate legally. The answer depends on the specific activities undertaken and the types of financial services and products offered.

This article aims to provide a comprehensive overview of the AFSL regime, helping businesses determine if they require a licence and understand the key compliance obligations associated with being an AFSL holder. By clarifying the licensing requirements, this guide will assist financial services providers in making informed decisions and ensuring they operate within the boundaries of the law.

What is an Australian Financial Services Licence (AFSL)?

An AFSL authorises individuals and businesses to provide financial services to clients in Australia. The licence is issued by the Australian Securities and Investments Commission (ASIC) and is required for anyone carrying on a financial services business in Australia.

You need an AFSL if you carry on a financial services business in Australia, regardless of whether you make a profit or if financial services are your sole business activity. The requirement applies even if you provide financial services as part of another business.

The courts consider several factors when determining if someone is carrying on a financial services business, including the degree of system, repetition and continuity in the activities. Even a one-off transaction may require an AFSL if there is an intention for it to be the first in a series of transactions.

When Do You Need an AFSL? Providing Financial Services and Products

Carrying on a financial services business in Australia generally requires an AFSL. You need an AFSL if you provide financial services, regardless of whether it’s for profit or as your sole business activity.

Financial Products and Services Requiring an AFSL

Financial services that require an AFSL include:

• Providing financial product advice, whether personal or general recommendations about financial products
• Dealing in financial products, such as buying, selling, or issuing products on behalf of clients
• Making a market for financial products by regularly quoting buy and sell prices
• Operating a registered managed investment scheme
• Providing custodial or depository services
• Providing traditional trustee company services
• Providing crowdfunding services
• Providing superannuation trustee services
• Providing claims handling and settling services
• Operating a corporate collective investment vehicle (CCIV)

Financial products covered under the AFSL regime include:

• Securities (stocks, bonds, debentures)
• Managed investment schemes
• Insurance (general, life, consumer credit)
• Derivatives and margin lending facilities
• Superannuation and retirement savings accounts
• Deposit and payment products
• Foreign exchange contracts
• Government debentures, stocks or bonds
• Carbon units

Carrying on a Financial Services Business

The determination of whether you are “carrying on a financial services business” depends on several factors:

1. Having a place of business in Australia
2. Establishing a share transfer or registration office in Australia
3. Administering or managing property in Australia as an agent or trustee

The courts consider the degree of system, repetition, and continuity in your activities. Even a single transaction could constitute carrying on a business if intended as the first in a series of transactions.

Activities that alone do not constitute carrying on a business include:

• Maintaining an Australian bank account
• Holding meetings of directors or shareholders
• Creating evidence of debt or property charges
• Conducting isolated transactions completed within 31 days
• Investing funds or holding property

Foreign Financial Services Providers (FFSPs) and AFSL Requirements

A foreign financial services provider (FFSP) that intends to provide financial services in Australia must either hold an AFSL, hold a Foreign Australian Financial Services Licence (FAFSL), or be entitled to rely on an exemption. The FAFSL regime became effective on 1 April 2020, replacing the previous “passport” relief system.

The FAFSL regime is designed to be more streamlined than the standard AFSL application process. To be eligible for a FAFSL, FFSPs must be regulated overseas by specified sufficiently equivalent regulatory regimes. Currently, the following jurisdictions are recognised as having sufficiently equivalent regulatory regimes:

• Denmark
• Germany
• Hong Kong
• France
• Luxembourg
• Ontario (Canada)
• Singapore
• Sweden
• United Kingdom
• United States

FFSPs from jurisdictions not listed above can apply to extend the FAFSL regime to include their regulatory regime.

Statutory Requirements

An FFSP may be required to hold an AFSL even without having a physical presence in Australia. The determination depends on whether the provider is:

• Carrying on a financial services business in Australia
• Establishing or using a share transfer office in Australia
• Administering, managing, or dealing with property in Australia as an agent or trustee
• Inducing people in Australia to use their financial services

The courts stress that whether activities constitute “carrying on a business in Australia” depends on the factual circumstances, including the degree of system, repetition and continuity of activities conducted in Australia.

Retail vs. Wholesale Clients

The distinction between retail and wholesale clients significantly impacts AFSL obligations and requirements. Under sections 761G and 761GA of the Corporations Act 2001 (Cth), wholesale clients are typically sophisticated or professional investors who meet specific criteria, while retail clients are afforded additional consumer protections to ensure fair treatment.

Defining Retail and Wholesale Clients

A retail client is generally considered an individual investor who is not classified as a wholesale client. They are afforded a higher level of regulatory protection due to being perceived as having less investment experience and sophistication. Wholesale clients, conversely, are typically professional or institutional investors with greater financial resources and expertise. The Corporations Act 2001 (Cth) provides specific criteria for classifying wholesale clients.

View this article here for a detailed breakdown of Retail vs Wholesale Clients.

Impact on AFSL Obligations

The classification of a client as either retail or wholesale significantly impacts the obligations of an AFSL holder. For retail clients, AFSL holders are subject to stricter conduct and disclosure requirements. This includes providing a Financial Services Guide (FSG) and a Statement of Advice (SOA), ensuring clear and comprehensive disclosure of fees and potential conflicts of interest, and adhering to a ‘best interests’ duty when providing personal advice.

For wholesale clients, while still requiring an AFSL, some of these obligations are less stringent or may not apply. For instance, the requirement for a detailed SOA may be waived, and the level of disclosure required may be reduced. However, even when dealing solely with wholesale clients, AFSL holders must still ensure compliance with relevant regulations and act honestly and fairly. It’s important to note that certain exemptions from licensing, disclosure, and conduct obligations may be available for entities dealing exclusively with wholesale clients.

Consequences of Operating Without a Required AFSL

Operating without the necessary AFSL is a serious offence under the Corporations Act 2001 (Cth). ASIC actively enforces compliance with licensing requirements to protect consumers and maintain the integrity of financial markets.

Providing financial services without an AFSL can result in both civil and criminal penalties. Courts impose fines calculated based on penalty units, which are periodically updated by legislation. Penalties may include significant financial fines for individuals and corporations, and in severe cases, imprisonment for individuals. Factors influencing the severity of penalties includes the scale, frequency, and intent behind the unauthorised activities.

ASIC’s enforcement powers include the ability to:

• Issue stop orders: These immediately halt unauthorised financial services activities.
• Freeze assets: ASIC can freeze bank accounts and other assets connected to illegal activities.
• Seek court orders: This can include winding up companies operating without the required licenses.
• Ban individuals: People can be prohibited from managing corporations or providing financial services.
• Require compensation: ASIC may direct offenders to compensate clients who incurred losses.

Even a single unauthorised financial service could attract ASIC scrutiny if it is intended as part of ongoing unlicensed operations. ASIC pays particular attention to:

• Activities targeting retail clients without adequate protections.
• Systematic or repeated breaches of licensing obligations.
• Attempts to bypass licensing requirements through complex corporate structures.
• Misleading claims regarding licensing status or authorisation.

Entities dealing exclusively with wholesale clients may qualify for certain exemptions but must still ensure they comply with other relevant regulations.

ASIC has demonstrated its commitment to enforcement through high-profile cases. For instance, it has secured penalties exceeding $1 million against entities for breaching AFSL obligations, emphasising the regulator’s focus on deterrence and accountability

Conclusion

Understanding AFSL requirements is crucial for anyone operating in Australia’s financial services sector. The regulatory framework established by ASIC ensures consumer protection and market integrity through comprehensive licensing requirements that cover a wide range of financial services and products, from providing financial advice to operating managed investment schemes.

Businesses and individuals seeking clarity on AFSL requirements and support in navigating these regulations are encouraged to connect with our industry-leading AFSL lawyers at AFSL House. We offer specialised expertise in Australian financial services licensing, helping you understand your obligations, explore available exemptions, and ensure AFSL regulatory compliance, enabling you to operate legally and ethically within the Australian market.

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.