How to Meet the Core Financial Resource Obligations for Your Credit Licence

Introduction

Securing an Australian Credit Licence (ACL) is a critical step for businesses in the credit industry, and a key component of this process involves understanding and meeting core financial resource obligations. These obligations, mandated by the Australian Securities and Investments Commission (ASIC) under the National Consumer Credit Protection Act 2009 (Cth), are fundamental to ensuring that a credit licensee can operate soundly and uphold its licence obligations.

For businesses applying for an ACL, it is essential to grasp that having adequate financial resources extends beyond daily operational needs; it also encompasses the capacity to maintain robust supervisory arrangements and consistently meet general conduct obligations. This guide provides essential information on these crucial requirements, including how to demonstrate compliance to ASIC and prepare for potential scrutiny, such as requests for an audit report on your financial resources, to support your ACL application.

Core Financial Resource Obligations for Australian Credit Licences

Funding Your Credit Activities & Supervision

A fundamental requirement when applying for an Australian credit licence is to demonstrate that your business possesses adequate financial resources. This obligation is stipulated by section 47(1)(l)(i) of the National Consumer Credit Protection Act 2009 (Cth) and outlined in ASIC’s Regulatory Guide 207 (RG 207.1(a)).

To meet this requirement, you must have:

• Sufficient financial means to engage in the credit activities your licence will authorise
• The financial capacity to establish and maintain the necessary supervisory arrangements for your operations

This requirement serves as a cornerstone of the ACL framework, ensuring that licensees can responsibly manage their credit business from the outset. It’s important to note that this obligation doesn’t apply if you’re a body regulated by the Australian Prudential Regulation Authority (APRA), which has its own financial resource requirements.

Financial Backing for ‘Efficient, Honest, Fair’ Conduct

Beyond specific financial benchmarks, your financial standing is intrinsically linked to your ability to meet general conduct obligations. Section 47(1)(a) of the National Consumer Credit Protection Act 2009 (Cth) mandates that an Australian credit licensee must do all things necessary to ensure that credit activities are engaged in efficiently, honestly, and fairly.

ASIC, in RG 207.1(b), reinforces that having adequate financial resources underpins your capacity to uphold these crucial standards. Sufficient financial backing helps ensure that your business is not pressured into, cutting corners on compliance and engaging in conduct that is not efficient, honest, or fair due to financial strain

Therefore, demonstrating robust financial health is a key indicator to ASIC of your ability to meet these overarching general conduct obligations when applying for an ACL.

Risk Management for Your Financial Resources

Another critical component of your core financial resource obligations is the implementation of adequate risk management systems. Section 47(1)(l)(ii) of the National Consumer Credit Protection Act 2009 (Cth) requires Australian credit licence applicants, unless regulated by APRA, to have such systems in place. ASIC’s RG 207.1(c) highlights this as a key obligation.

These risk management systems must specifically address the potential risk that your financial resources could become inadequate. This includes ensuring you can:

• Continue your business in compliance with your licence obligations
• If necessary, wind up your business in an orderly manner, as detailed in RG 207.16

Properly implemented risk management systems demonstrate a proactive approach to financial stability and compliance.

ASIC’s Expectations: Demonstrating Financial Adequacy

When you apply for an ACL, ASIC has minimum expectations for how you will demonstrate the adequacy of your financial resources. While the specific actions required will vary based on the nature, scale, and complexity of your proposed credit activities (RG 207.9), ASIC outlines several baseline expectations in RG 207.10.

These expectations include your ability to:

• Ensure access to sufficient financial resources: You must demonstrate that you can access enough funds to meet all your debts as and when they become due and payable. This ensures the ongoing solvency and viability of your credit business.
• Plan and monitor cash flows: You are expected to have robust processes for planning and monitoring your cash flows. This is to ensure they are sufficient to adequately meet your obligations as a credit licensee under the National Consumer Credit Protection Act 2009 (Cth).
• Keep written records: Maintaining written records is crucial. These records must demonstrate that your financial resources are being monitored on a regular basis, providing a clear audit trail of your financial management and compliance.

Proving Financial Resource Compliance to ASIC

Applicant’s Duty: Confirming Financial Compliance

When applying for an ACL, you must demonstrate that you can meet the necessary financial resource requirements from the very beginning of your application. ASIC requires assurance that your business has the financial capacity to operate legally and ethically.

It is essential to understand that under section 37(1)(b) of the National Consumer Credit Protection Act 2009 (Cth), ASIC cannot grant an ACL if there is reason to believe that the applicant will not be able to comply with the financial resource requirement.

Therefore, before seeking an ACL, you should:

• Thoroughly prepare your financial documentation
• Gain a clear understanding of your current financial standing
• Ensure you can affirm compliance with all financial resource obligations

Taking these steps is critical for a successful licence application.

ASIC’s Right to Request a Financial Audit Report

During the assessment of your ACL application, ASIC has the authority to scrutinise your financial resources to ensure they are adequate. This power is outlined in RG 207.47 and supported by section 37(4)(b) of the National Consumer Credit Protection Act 2009 (Cth).

As part of this process, ASIC may require you to submit an audit report that:

• Must be prepared by a suitably qualified person
• Will focus specifically on the adequacy of your financial resources
• Provides an independent perspective on your financial capability

As an ACL applicant, you should be prepared for such a request and understand that this audit is a tool ASIC uses to verify compliance with the crucial financial resource obligations.

Conclusion

Meeting the core financial resource obligations stipulated by ASIC is a fundamental step for any business applying for an ACL. These obligations, rooted in the National Consumer Credit Protection Act 2009 (Cth), require applicants to:

• Possess adequate financial resources for their credit activities and supervisory arrangements
• Ensure they can meet their general conduct obligations to operate efficiently, honestly, and fairly
• Maintain appropriate risk management systems

A comprehensive understanding of ASIC’s expectations is crucial for a successful outcome and sustained adherence to all licence obligations. This includes being aware of the need to confirm compliance and the possibility of an audit report on financial resources during the credit licence application.

Our lawyers can help you diligently prepare these financial requirements, and will not only guide you to the ACL application process but also underpin long-term compliance for every credit licensee. Contract AFSL House today, and kickstart your licensing journey.

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