Obtaining Your Own AFSL vs. Becoming an Authorised Representative

Introduction

Navigating the Australian financial services landscape requires careful consideration of licensing. Businesses providing financial services must decide between obtaining their own Australian Financial Services Licence (AFSL) and becoming an authorised representative of an existing AFS licensee). This decision has significant implications for business operations, compliance, and long-term growth.

This article explores the advantages and disadvantages of each path, providing insights to help you make the best choice for your business. We will examine the costs, compliance burdens, flexibility, and potential benefits associated with holding your own AFSL versus operating under an existing licensee. Understanding these factors is crucial for success in the Australian financial services industry.

Advantages of Having Your Own AFSL

Whether applying for your own AFSL or purchasing an existing AFSL, holding your own AFSL offers a range of benefits that empower businesses with greater control, flexibility, and revenue opportunities. Continue reading below to explore the key advantages.

1. Full Control Over Business Operations

Whether obtained by purchasing an existing AFSL or from applying for a new AFSL, Having your own AFSL provides complete control over your business direction, operations, and culture. This autonomy allows you to make decisions without needing approval from a licensee, enabling you to adapt quickly to market changes and implement your vision for the business.

• Independence in Decision-Making: Unlike authorised representatives, who must operate within the restrictions of a licensee, AFSL holders have the freedom to determine their own systems, processes, and strategies.
• Flexibility to Specialise: For example, if a firm wants to focus on a niche financial product, such as ethical investments or emerging market funds, it can adapt its operations and compliance program to specialise in this area without waiting for approval from a licensee.

This level of control allows you to shape your business according to your goals and client needs, giving you a competitive edge in a dynamic market.

2. Greater Freedom in Product and Service Offerings

Operating under your own AFSL allows you the flexibility to provide any financial services and products you are authorised for, without being constrained by a licensee’s approved product list. This ensures your offerings are driven by client needs rather than external restrictions.

• Ability to Offer a Broader Product Range: For instance, a firm advising on complex financial products can offer a wider selection of suitable options to clients. In contrast, an authorised representative may be limited to the licensee’s approved product list, which could restrict client choices and reduce the firm’s ability to meet specific client demands.
• Client-Centric Customisation: By tailoring your service offerings to align with your clients’ preferences, you can build stronger relationships and deliver more personalised solutions.

This freedom enhances your ability to serve clients comprehensively and positions your business as a provider of flexible and customised financial services.

3. Opportunities to Generate Additional Revenue

Holding your own AFSL enables you to create additional revenue streams by authorising other financial services businesses to operate under your licence. This not only offsets operational costs but also provides a scalable income model.

• Authorising Representatives for Revenue: For example, a growing firm could authorise smaller financial advisory businesses as its representatives. By charging fees for the use of your licence and the support services you provide, you can generate supplementary income.
• Long-Term Financial Sustainability: Compared to paying ongoing fees as an authorised representative, this model can make maintaining your own licence more financially viable in the long term.

This ability to monetise your licence allows you to expand your market presence while generating consistent revenue beyond your primary business operations.

4. Customisation of Compliance Programs

With your own AFSL, you can design compliance programs specifically suited to your business operations and the services you provide. This targeted approach often results in more efficient and relevant compliance management compared to generic frameworks imposed by licensees.

• Streamlined Compliance for Specialised Services: For example, if a firm specialises in a specific type of investment, such as property syndication or derivatives, it can create a compliance program focused on the regulations relevant to that investment type. This reduces the administrative burden associated with broader, less applicable compliance frameworks.
• Operational Efficiency Through Tailored Processes: By tailoring compliance processes to your unique activities, you can streamline operations while still meeting regulatory requirements.

This flexibility allows you to maintain high compliance standards while minimising unnecessary complexity and costs.

Having your own AFSL provides unparalleled control, flexibility, and growth opportunities, making it an attractive option for businesses looking to establish themselves as independent and client-focused financial service providers. 

Disadvantages of Having Your Own AFSL

While holding your own AFSL offers significant benefits, it also comes with notable challenges. These include financial, operational, and regulatory burdens that require careful consideration. Understand the key disadvantages below.

1. Significant Cost Implications

Obtaining and maintaining an AFSL involves substantial financial commitments, both upfront and ongoing. These costs can place a significant strain on resources, particularly for smaller businesses.

• Initial Costs: The application process itself requires significant upfront expenses, including ASIC application fees, professional indemnity insurance premiums, and the setup of compliance systems.
• Ongoing Expenses: Once the licence is obtained, there are recurring costs such as ASIC levies, regular compliance audits, and staff training programs. For example, professional indemnity insurance is mandatory for AFSL holders and can represent a significant annual expense, while regular audits ensure compliance but add to operational costs.

These financial obligations can make holding an AFSL a costly endeavour, requiring careful budgeting and financial planning to ensure sustainability.

2. Time and Resource Requirements

Managing an AFSL demands a considerable investment of time and internal resources. The operational requirements of maintaining compliance and oversight, such as maintaining the financial requirements and obligations, can be particularly challenging for businesses without dedicated teams.

• Ongoing Compliance Efforts: The licensee must allocate significant time to compliance monitoring, staff supervision, and maintaining proper documentation systems. For instance, implementing training programs, conducting regular compliance reviews, and ensuring representatives meet their ongoing professional development requirements all require dedicated personnel and robust systems.
• Adapting to Regulatory Changes: Imagine a scenario where new regulatory requirements necessitate updates to compliance procedures. This process demands both time and expertise, as well as the resources to implement the necessary changes across the business.

The time and resource demands of holding an AFSL can divert attention from core business activities, making it essential to have a well-structured compliance framework in place. In addition to the regulatory burden, the need to ensure all staff members meet the fit and proper test adds another layer of complexity. This underscores the importance of having strong internal policies and procedures to ensure ongoing compliance with AFSL regulations. Failure to meet these obligations can result in severe consequences, making compliance a top priority for any organisation holding an AFSL.

3. Increased Legal Responsibilities

As an AFSL holder, you bear ultimate legal responsibility for all compliance obligations under the Corporations Act 2001. This responsibility extends to the actions of all representatives operating under your licence.

• Accountability for Representatives: For example, if a representative breaches regulations, the AFSL holder may be held accountable and face penalties or enforcement action from ASIC.
• Comprehensive Obligations: The licensee must ensure adequate financial resources, implement proper risk management systems, and report significant breaches to ASIC. Additionally, maintaining comprehensive records of all financial services provided is mandatory.

These legal responsibilities place a heavy burden on AFSL holders, requiring meticulous oversight and a proactive approach to compliance to avoid potential liabilities.

4. Complex Regulatory Requirements

Navigating the intricate regulatory landscape of financial services is a continuous challenge for AFSL holders. The regulatory environment is dynamic, requiring constant vigilance and adaptability.

• Keeping Up with Regulatory Changes: AFSL holders must stay abreast of frequent updates to regulations and ensure their systems and procedures remain compliant. For instance, changes to disclosure requirements or responsible lending obligations may necessitate adjustments to internal processes and documentation.
• Comprehensive Compliance Programs: The licensee must implement and maintain detailed policies covering areas such as conflicts of interest, dispute resolution, and risk management. These policies must not only meet ASIC’s requirements but also be tailored to the specific operations of the business.

The complexity of these requirements can be overwhelming, particularly for businesses without dedicated compliance teams, and failing to meet them can result in significant penalties or even licence revocation.

While holding your own AFSL provides independence and growth opportunities, the associated costs, responsibilities, and regulatory challenges require careful consideration. 

Advantages of Becoming an Authorised Representative

Becoming an authorised representative under an existing AFSL offers a range of benefits, particularly for businesses looking to reduce costs, access established systems, and minimise compliance burdens. Below, we explore the key advantages of becoming an authorised representative.

1. Reduced Legal and Financial Liability

As an authorised representative, your liability exposure is significantly reduced because the AFSL holder bears ultimate responsibility for meeting licensing obligations and regulatory requirements. This arrangement minimises your legal risks compared to holding your own AFSL.

• Accountability to ASIC: For example, if a compliance issue arises, it is the AFSL holder who is primarily accountable to ASIC. While you may still have certain responsibilities, the licensee assumes the bulk of the legal and financial liability.
• Peace of Mind: This structure allows you to focus on your core business activities without the added pressure of managing the full spectrum of compliance obligations.

By operating under an AFSL holder, you benefit from a safety net that shields you from the significant legal risks associated with direct licence ownership.

2. Immediate Access to Established Systems

One of the key advantages of becoming an authorised representative is the ability to leverage the licensee’s existing infrastructure. This includes compliance programs, templates, and research resources, which can save you significant time and effort.

• Ready-to-Use Resources: For instance, you can utilise the licensee’s pre-existing documentation for client onboarding, advice templates, and reporting processes, rather than building these systems from scratch.
• Streamlined Operations: With access to established compliance frameworks, training materials, and research capabilities, you can focus more on serving clients and growing your business instead of developing operational frameworks.

This access to a well-developed infrastructure allows you to hit the ground running and operate efficiently from day one.

3. Comprehensive Professional Support Services

Licensees typically provide a range of professional support services to their authorised representatives, which can be invaluable for both new and established businesses.

• Technical and Compliance Assistance: For example, licensees often offer access to technical specialists and compliance experts who can provide guidance on complex regulatory matters.
• Training and Development: Many licensees also provide professional development programs tailored to financial advisers, ensuring you stay up-to-date with industry standards and regulatory changes.
• Additional Support: Some licensees even offer marketing and business development support, helping you grow your client base and enhance your market presence.

This ongoing support reduces the administrative burden and allows you to concentrate on delivering high-quality financial services to your clients.

4. Lower Upfront and Ongoing Costs

Becoming an authorised representative generally involves significantly lower upfront costs compared to obtaining your own AFSL. This makes it an attractive option for businesses looking to enter the financial services industry without the heavy financial burden of licence ownership.

• Cost Savings on Licensing Infrastructure: The licensee absorbs the substantial expenses associated with establishing and maintaining compliance systems, professional indemnity insurance, and other infrastructure requirements.
• Manageable Fees: For example, instead of incurring the high costs of maintaining your own AFSL, you pay ongoing fees to the licensee, which are often more manageable and predictable.

This cost-effective arrangement allows you to allocate resources toward other areas of your business, such as client acquisition and service delivery, while still operating under a compliant framework.

Disadvantages of Becoming an Authorised Representative

While becoming an authorised representative under an existing AFSL offers certain conveniences, it also comes with notable drawbacks. Continue reading to explore restrictions on business operations, product limitations, and ongoing financial obligations.

1. Restricted Business Operations

Operating as an authorised representative means working within the constraints imposed by the licensee. These restrictions can limit your ability to run your business according to your preferred methods and systems, potentially hindering growth and flexibility.

• Licensee-Imposed Rules: Financial advisers often face rules regarding how they can provide financial services. For instance, the licensee may require you to follow specific processes, use particular software platforms, or adhere to standardised advice templates that may not align with your business model.
• Limitations on Services: Imagine a scenario where an authorised representative wants to offer advice on a specific type of investment product, such as cryptocurrency or niche managed funds. If the licensee’s AFSL does not cover these activities, the representative would be unable to provide such services, limiting their ability to cater to a specialised market.

These operational restrictions can be frustrating for advisers who wish to innovate or tailor their services to niche client needs.

2. Product Limitations

As an authorised representative, you are typically restricted to recommending products from the licensee’s approved product list (APL). While APLs are designed to ensure compliance and quality control, they can significantly limit your ability to provide truly independent advice.

• Impact on Client Outcomes: For example, if a client’s financial goals would be best served by a product not included on the APL, the authorised representative would be unable to recommend it. This could compromise the client’s optimal outcome and potentially damage the adviser’s reputation for offering tailored solutions.
• Conflicts of Interest: In some cases, large corporate licensees—particularly those owned by or aligned with financial institutions—may incentivise advisers to recommend in-house or affiliated products. This can create a conflict of interest, where the adviser’s recommendations may be influenced by the licensee’s preferences rather than the client’s best interests.

These product restrictions can undermine the adviser’s ability to deliver personalised and unbiased advice, which is often a key expectation of clients.

3. Ongoing Fee Obligations

Becoming an authorised representative involves regular financial commitments to the licensee. These fees, while covering the use of the AFSL and support services, can become a significant recurring expense that impacts profitability.

• Fee Structures: Authorised representatives typically pay either flat monthly fees or a percentage of their revenue to the licensee. For instance, an adviser generating substantial revenue may find that a large portion of their earnings is consumed by licensee fees, reducing their overall profitability.
• Additional Costs: Beyond the base fees, representatives may also be required to pay for mandatory training programs, compliance audits, or other services provided by the licensee. Even if these services have limited relevance to the representative’s practice, they are often non-negotiable expenses.

These ongoing costs can add up over time, making it challenging for representatives to reinvest in their own business development or achieve long-term financial growth.

While becoming an authorised representative offers a lower-cost entry into the financial services industry, the associated restrictions and financial obligations can limit your ability to operate independently and maximise profitability. 

Making Your Decision

Deciding between obtaining your own AFSL and becoming an authorised representative requires careful evaluation of your business’s unique circumstances. Factors such as the size and scale of your operations, the resources you have available, and your long-term business goals will heavily influence the best path forward. Below, we break down these considerations to help guide your decision.

1. Business Size and Scale Considerations

The size and scale of your financial services business play a crucial role in determining whether to pursue your own AFSL or operate as an authorised representative. Each option suits businesses at different stages of growth.

• Smaller Firms or Startups: For smaller practices or startups, becoming an authorised representative often provides a more manageable entry point. This approach allows you to leverage the established infrastructure and support of a licensee, minimising upfront costs and administrative burdens.
• Larger, Established Businesses: On the other hand, larger firms with substantial client bases and revenue streams may find obtaining their own AFSL more cost-effective in the long term. For example, a large firm planning to expand its service offerings or authorise other representatives would benefit from the autonomy and scalability provided by its own AFSL.

Smaller businesses may find it more practical to remain under an existing licensee’s structure until they reach a scale where self-licensing becomes financially viable, while larger businesses often thrive with the independence of their own AFSL.

2. Resource Availability Assessment

The availability of resources—both financial and operational—is a critical factor when considering self-licensing. Operating an AFSL requires significant internal capabilities, and a lack of resources could make this option unfeasible.

• Financial and Operational Demands: Obtaining and maintaining an AFSL involves substantial financial investment, including compliance system setup, professional indemnity insurance, and ongoing ASIC levies. Additionally, you need sufficient personnel to handle compliance monitoring, staff supervision, and record-keeping.
• Licensee Support for Limited Resources: If your resources are limited, becoming an authorised representative may be the more practical choice. For example, a smaller firm with limited staff and financial reserves can rely on the licensee to absorb many of the compliance and administrative burdens, allowing the firm to focus on serving clients.
• Well-Resourced Firms: Conversely, a firm with experienced compliance officers, robust financial reserves, and technical specialists may be well-positioned to manage the responsibilities of its own AFSL. For instance, a business with a dedicated compliance team could efficiently handle ASIC’s ongoing requirements, making self-licensing a viable long-term strategy.

Carefully assess whether your current resources are sufficient to meet the demands of self-licensing or whether leveraging a licensee’s support would better suit your current capabilities.

3. Long-Term Business Goals

Your long-term business objectives should be a key driver of your licensing decision. The right choice will depend on whether you prioritise growth, control, or operational simplicity.

• Expansion and Diversification Goals: If your goal is to expand rapidly, diversify your services, or build a distinct brand identity, having your own AFSL offers greater flexibility and control. For example, a firm aiming to specialise in a niche market, such as ethical investments or complex financial products, would benefit from the tailored compliance programs and broader product offerings facilitated by its own AFSL.
• Streamlined Operations and Client Focus: On the other hand, if your focus is on streamlined operations, minimising administrative overhead, and leveraging existing resources, becoming an authorised representative may be more suitable. For instance, a firm that prioritises client service and prefers to delegate compliance management to a licensee can focus on its core business activities without the distractions of maintaining its own licence.

Aligning your licensing decision with your long-term vision ensures that your choice supports your business’s growth and operational priorities.

Ultimately, the decision between obtaining your own AFSL and becoming an authorised representative depends on your business’s size, resources, and goals. 

Conclusion

Choosing between obtaining your own AFSL and becoming an authorised representative requires careful consideration of your business circumstances and long-term objectives. Having your own AFSL offers greater control and flexibility but comes with significant compliance responsibilities and costs. Meanwhile, operating as an authorised representative provides established support systems and reduced liability but may restrict business operations and product choices.

The decision ultimately depends on factors like business size, available resources, and growth plans. If you need assistance with either obtaining your own AFSL or becoming an authorised representative of an existing AFSL holder, do not hesitate to reach out to our experienced AFSL lawyers at AFSL House for AFSL legal assistance.

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.