How to Avoid ASIC Cancelling Your AFSL Due to Inactivity

Introduction

Holding an Australian Financial Services Licence (AFSL) is an active responsibility, and recent legislative changes have empowered the Australian Securities and Investments Commission (ASIC) to act decisively against inactive licensees. Under the Corporations Act 2001 (Cth), ASIC has the power to immediately cancel an AFSL if the holder fails to provide any financial services for a continuous period of six months. This establishes a clear “use it or lose it” principle to ensure licences are held by genuinely operating businesses.

This new enforcement focus creates a significant compliance risk, including the potential for AFSL audits and investigations, for many AFSL holders, particularly startups, businesses that are winding down, or those holding a licence for future use. This guide provides essential information and practical steps to help licensees understand what constitutes providing a financial service, how to demonstrate ongoing activity, and ultimately, how to safeguard their licence from cancellation.

Understanding ASIC’s Power to Cancel an AFSL

The Legislative Basis for Licence Cancellation

ASIC derives its authority to cancel an AFSL for inactivity directly from the Corporations Act 2001 (Cth). The central provision is section 915B, which empowers ASIC to suspend or cancel a licence immediately, without providing the licensee with an opportunity for a hearing.

This power is triggered under two main circumstances related to inactivity:

Circumstance for Cancellation	Description
Failure to Commence	An AFSL may be cancelled if the licensee does not provide any financial services covered by the licence within six months of it being granted.
Ceasing to Carry On Business	ASIC may cancel a licence if a licensee ceases to carry on its financial services business, with a continuous six-month period of inactivity often serving as evidence.

These powers were significantly strengthened by the Financial Sector Reform (Hayne Royal Commission Response—Better Advice) Act 2021 (Cth), reinforcing ASIC’s ability to act decisively against dormant licences.

The Policy & Purpose of ASIC’s Enforcement Focus

ASIC’s focus on inactive licences is driven by a clear policy objective to ensure that holding an AFSL is an active responsibility, not a passive asset. The rationale behind this enforcement priority is to uphold the integrity of the financial services industry and protect consumers.

The key purposes behind ASIC’s power to cancel a licence for inactivity include:

Policy Objective	Rationale & Purpose
Preventing ‘Shelf Licences’	To eliminate the market for dormant licences held for potential sale, ensuring licences are not treated as passive assets by those who have not met the rigorous requirements to apply for an AFSL.
Maintaining Market Integrity	To ensure that only genuinely operating businesses hold an AFSL, promoting a fair and transparent market where all participants are subject to ongoing regulatory oversight.
Protecting Consumers	To safeguard consumers from potential harm by ensuring licensees are actively providing services, which allows ASIC to effectively monitor compliance and enforce obligations.

A Risk Checklist for AFSL Holders

Startups & Pre-Launch Businesses

New businesses that have successfully obtained an AFSL but have not yet launched their product or onboarded clients face significant vulnerability. The regulatory timeframe is strict: the six-month period for commencing activity begins from the date the licence is granted, not from your intended start date of operations.

This creates particular risks when:

• Delays occur in product development
• Capital raising takes longer than anticipated
• Market entry is postponed

Any of these delays can easily extend beyond the permitted timeframe, placing the AFSL at immediate risk of cancellation by ASIC.

Shelf Licences & AFSLs Held for Future Use

Holding an AFSL for a future project that has been delayed or is yet to commence represents another high-risk scenario. These “shelf licences” are often acquired for strategic purposes but can become dormant if project timelines slip.

It’s important to understand that ASIC’s power to cancel a licence for inactivity is specifically designed to prevent the warehousing of licences. This reinforces a fundamental principle: an AFSL is an active responsibility, not a passive asset to be held indefinitely.

Businesses Winding Down or in Run-Off

Firms that have ceased dealing with clients or are in the process of winding down their operations but have not formally cancelled their AFSL are also exposed to regulatory risk. Some businesses may retain the licence “just in case” or to manage residual obligations.

However, the regulatory position is clear: if the firm is no longer providing any financial services under its authorisations for a continuous six-month period, it is considered to have ceased its financial services business. This triggers ASIC’s power to cancel the licence, regardless of intentions to maintain it.

Pivoting & Restructuring Businesses

Companies undergoing a strategic pivot or restructuring may inadvertently create a period of inactivity that puts their AFSL at risk. This vulnerability typically arises when:

• A business stops providing one type of financial service to focus on developing another
• The transition creates a service gap where no authorised financial services are provided
• This gap extends for six months or more

In such scenarios, ASIC may exercise its power to cancel the licence, even when the inactivity is part of a deliberate business transformation strategy.

What Counts as a Financial Service?

Examples of Qualifying AFSL Activities

To avoid having your AFSL cancelled for inactivity, it is essential to understand what ASIC considers “providing a financial service.” This is not limited to acquiring new clients; rather, it involves actively engaging in the services your licence authorises you to provide. The key is to demonstrate that you are meeting your obligations to at least one client, investor, or policyholder.

Activities that generally prove your AFSL is active include:

Qualifying Activity	Description & Examples
Providing Financial Product Advice	Delivering ongoing advice to existing clients, such as conducting an annual portfolio review and issuing a Record of Advice.
Acting as a Responsible Entity (RE)	Performing duties for a registered scheme (even if closed to new funds), including monitoring the compliance plan, managing assets, and communicating with investors.
Dealing in Financial Products	Arranging or executing transactions for clients (e.g., buying/selling shares) or maintaining an existing insurance portfolio.
Claims Handling and Settling	Providing claims handling and settling services for an insurance portfolio, including assessing, negotiating, or settling a claim.
Providing Custodial or Depository Services	Holding client assets or providing ongoing administration and custodial services for investments.

Activities That Don’t Count as a Financial Service

Certain business operations, while necessary, are not considered “providing a financial service” by ASIC. Relying on these activities alone will not protect your AFSL from being cancelled for inactivity, as they do not involve the delivery of a regulated service to a client.

Common activities that do not qualify on their own include:

Category of Non-Qualifying Activity	Specific Examples
Marketing and Business Development	General marketing, brand building, and lead generation efforts.
Internal Development and Preparatory Work	Building a platform, developing technology, conducting internal testing without live clients, drafting internal policies, recruiting staff, or undertaking professional development.
Maintaining Compliance Memberships	Holding mandatory professional indemnity insurance and maintaining membership with the Australian Financial Complaints Authority (AFCA).

How to Demonstrate Activity & Avoid AFSL Cancellation

Keeping Meticulous Records & an Activity Log

Maintaining detailed and contemporaneous records is the most effective way to defend your AFSL against a claim of inactivity from ASIC. An “activity log” serves as crucial evidence that you are carrying on a financial services business. This log should map every instance of service provision directly to the specific authorisations on your licence.

To support your activity log, you should retain a comprehensive file of evidentiary documents. Best practice is to keep these records for a minimum of seven years.

Key artefacts to include in your records are:

Record Type	Examples of Supporting Evidence
Advice Documents	Statement of Advice (SoA), Record of Advice (RoA), client file notes, emails, and signed acknowledgements.
Dealing and Transaction Records	Client instructions, order tickets, trade confirmations, and settlement records.
Responsible Entity (RE) Duties	Compliance plan monitoring documents, committee and board minutes, audit reports, and communications with scheme members.
Claims Handling Evidence	Complete claim files, including assessments, correspondence with claimants, and settlement determinations.
Custodial Service Records	Updated asset registers, reconciliation reports, and client statements.

Proactively Engaging ASIC on Temporary Inactivity

If your business has a legitimate reason for temporary inactivity, such as a delayed product launch or a strategic pivot, proactive communication with ASIC is essential. For a failure to commence business within the first six months of your licence being granted, you can request an extension of time. This request must be lodged in writing with ASIC within 15 business days after the initial six-month period ends.

While there is no formal extension process for inactivity that occurs later in the licence’s life, early and transparent engagement can influence ASIC’s discretion.

Your written notification should always include:

Component of Notification	Required Details
Statement of Status	A clear declaration that you have not commenced your financial services business within the required timeframe.
Reason for Delay	The specific reasons for the delay in commencing operations.
Expected Commencement	The date by which you realistically expect to begin providing financial services.
Changes to Services	Details of any changes to the financial products or services you intend to provide.
Ongoing Compliance	An explanation of how you will continue to meet your general obligations as a licensee during the inactive period.

Pursuing a Voluntary Licence Cancellation as a Safer Exit

If your AFSL is no longer needed or if inactivity is likely to be prolonged, understanding how to cancel your AFSL is a strategic and lower-risk alternative to risking an enforced cancellation by ASIC. A proactive, orderly exit avoids potential reputational damage and demonstrates good compliance conduct, which is beneficial if you plan to apply for a licence in the future.

The process for voluntary cancellation involves several key steps, which must be completed before submitting your application through the ASIC Regulatory Portal:

• Revoke all authorised representative appointments.
• Lodge all outstanding annual financial statements and audit reports.
• Ensure your membership with the AFCA is current and resolve any outstanding client disputes.
• Settle any outstanding fees owed to ASIC.
• Confirm that all client money and property has been returned.

Conclusion

Holding an AFSL is an active responsibility, and ASIC’s power to cancel a licence for six months of inactivity reinforces the “use it or lose it” principle. By understanding what constitutes a financial service, maintaining meticulous records, and knowing the risks, AFSL holders can ensure they remain compliant and safeguard their licence.

If you are concerned about your AFSL’s activity status or require guidance on compliance, contact the AFSL lawyers at AFSL House in New South Wales today.  Our specialised services can help you navigate regulatory challenges and turn them into strategic opportunities, ensuring your financial services business remains secure.

Frequently Asked Questions (FAQ)