Introduction
When there is a change in control, Australian Financial Services Licence (AFSL) holders must promptly notify the Australian Securities and Investments Commission (ASIC) to maintain compliance and uphold their licensing obligations. This requirement ensures that AFSL holders remain transparent and accountable in their financial and operating policies, safeguarding the integrity of the financial services sector.
Failing to notify ASIC of a change in control can lead to severe consequences, including legal penalties and potential suspension or cancellation of the licence. Understanding and adhering to these reporting obligations is crucial for AFSL holders to avoid disruptions in their operations and maintain their standing within the financial services industry.
Definition of Control
Control, within the framework of AFSL holders, is defined by several key factors under the Corporations Act 2001 (Cth). A change in control occurs when an entity or individual gains the ability to influence significant decisions within the AFSL holder. Specifically, control is established if a person or entity has:
- Voting Power: The capacity to cast, or control the casting of, more than half of the maximum number of votes at a general meeting of the AFSL holder.
- Share Capital Ownership: Directly or indirectly holding more than half of the issued share capital of the AFSL holder, excluding any preferred shares that do not confer participation rights beyond a specified amount in profit or capital distributions.
- Board Composition Control: The ability to control the composition of the AFSL holder’s board or governing body, thereby influencing governance and strategic decisions.
- Decision-Making Capacity: The capacity to determine the outcome of decisions regarding the AFSL holder’s financial and operational policies. This includes considering the practical influence exerted and any patterns of behaviour affecting these policies.
It is important to note that control can be exerted through multiple avenues simultaneously, and a change in any of these areas can signify a shift in control.
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Types of Changes that Trigger Reporting Obligations
Several types of changes can trigger reporting obligations for AFSL holders, necessitating timely notification to the Australian Securities and Investments Commission (ASIC). These changes include:
| Type of Change | Description/Key Features | Key Indicator of Control |
| Change in Shareholding Structure | New entity/individual acquires >50% of issued share capital within a 12-month period (excluding certain preference shares). | Shift in ownership percentage granting majority voting rights. |
| Alteration in Board Composition | Appointment or removal of directors impacting decision-making and governance. | Capacity to control the majority of board appointments. |
| Shift in Decision-Making Authority | New entity/individual gains practical ability to influence or determine financial and operational policies (including patterns of behaviour). | Ability to direct or significantly influence key financial and operational decisions. |
| Mergers and Acquisitions | AFSL holder merges or is acquired, leading to a new controlling entity. | Change in ownership, board composition, or decision-making authority due to the merger/acquisition. |
| Change in Ultimate Holding Company | Alterations in the ownership chain affecting the ultimate holding company. | Change in the entity at the top of the ownership structure. |
| Multiple Control Points | Change in any party that has control under one or more tests (e.g., majority shareholder, board controller, powerful CEO). | Shift in control held by any of the controlling parties. |
| Associated Entities | Changes related to entities where one controls the board of the other (subsidiary) or through agreements granting control (e.g., loan agreement). | Establishment or breakdown of control relationships between entities. |
Each of these changes, whether occurring independently or in combination, necessitates a report to ASIC within the prescribed timeframes to ensure compliance and maintain the integrity of the AFSL holder’s licensing status.
Reporting Obligations Under the Corporations Act 2001 (Cth)
Timeframes for Notifying ASIC
AFSL holders must adhere to specific notification obligations under the Corporations Act 2001 (Cth), specifically Section 912DA and Regulation 7.6.04(2) of the Corporations Regulations 2001 (Cth), to ensure compliance when there is a change in control.
- Section 912DA of the Corporations Act 2001 (Cth) requires an AFSL holder to notify ASIC if an entity begins or ceases to control the licensee. This notification must be made within 30 business days after the change in control occurs. A breach of this requirement is a strict liability offence.
- Regulation 7.6.04(2) of the Corporations Regulations 2001 (Cth) mandates that AFSL holders notify ASIC within 10 business days after becoming aware of any change in control. This requirement is a licence condition, and a breach would constitute a breach of section 912A of the Act.
It is important to note that both obligations can apply, and the AFSL holder is expected to meet the shorter timeframe. Therefore, it is prudent for all AFSL holders to notify ASIC within 10 business days of becoming aware of a change in control.
Prescribed Forms and Submission Process
AFSL holders must use designated forms and follow established procedures mandated by the Corporations Act 2001 (Cth) and related regulations to notify ASIC of changes in control. Form FS20 is the primary form for this purpose.
- Completing and Submitting Form FS20: AFSL holders must accurately fill out Form FS20, providing detailed information about the change in control, including the identity of the new controlling entity and the nature of the control shift. The completed form must be submitted to ASIC through the appropriate channels, typically via the AFS Licensee portal. It is essential to ensure the form is lodged within the required timeframe—10 business days of becoming aware of the change or 30 business days after the change occurs, whichever is shorter.
- Ensuring Compliance: Accurate and timely submission of Form FS20 is crucial. AFSL holders should implement internal compliance systems to monitor and report changes promptly, thereby avoiding breaches of their licensing conditions under the Corporations Act 2001 (Cth).
By following these steps and utilising Form FS20 correctly, AFSL holders can maintain compliance with the Corporations Act 2001 (Cth), ensuring ASIC remains informed of significant changes in control.
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Procedures for Ensuring Compliance
Implementing Compliance Programs
Robust compliance programs are essential for AFSL holders to detect and respond to changes in control effectively. These programs should include procedures for continuous monitoring of ownership structures, regular reviews of corporate governance practices, and internal audits to ensure adherence to regulatory requirements. Implementing automated systems can enhance the efficiency of tracking significant changes and ensure timely notifications to ASIC.
Identifying Controllers and Associated Entities
Identifying controllers and associated entities is crucial for AFSL holders to maintain compliance with reporting obligations. Methods for identification include:
- Regularly updating shareholder registers and monitoring share ownership thresholds: Keeping accurate and up-to-date records helps in quickly identifying any shifts in control.
- Conducting due diligence on new investments or acquisitions: Assessing potential impacts on control structures ensures that changes are recognised promptly.
- Establishing clear criteria for assessing the influence of key individuals and related entities: Defining what constitutes control aids in consistent and accurate identification.
- Utilising compliance software to track and flag potential changes: Technology can streamline the monitoring process, reducing the risk of oversight.
These practices help ensure that any changes in control are promptly identified and reported to ASIC as required.
ASIC’s Role and Actions Post-Notification
Monitoring and Ensuring Ongoing Compliance
After receiving a notification of a change in control, ASIC actively monitors AFSL holders to ensure continued compliance with licensing requirements. This involves reviewing the details provided in the notification and assessing whether the new control structure maintains the licensee’s ability to comply with financial services obligations.
ASIC may conduct further investigations or require additional information from the AFSL holder to verify compliance. This proactive monitoring helps maintain the integrity of the financial services industry and protects consumer interests.
Potential Consequences of Non-Compliance
Failure to comply with post-notification obligations can result in severe consequences for AFSL holders. ASIC has the authority to take actions such as suspending or cancelling the AFSL if a licensee does not adhere to compliance requirements.
For instance, ASIC suspended the AFSL of Australian Capital Markets Advisory Services Pty Ltd after a change in control led to non-compliance with licensing conditions. This suspension illustrates the strict enforcement ASIC applies to maintain industry standards and protect consumers.
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Case Study: ASIC Suspension of ACMAS
Background of ACMAS Suspension
In June 2015, Australian Capital Markets Advisory Services Pty Ltd (ACMAS) experienced a significant change in control, becoming a wholly-owned subsidiary of Formax International Market Limited. This transition involved a complete overhaul of the company’s directors and shareholdings. Following this change, ACMAS ceased providing financial services as the new management was unable to demonstrate full compliance with multiple AFS licensing requirements.
ASIC responded to these developments by suspending ACMAS’s Australian Financial Services (AFS) licence until 27 November 2015. The suspension was a precautionary measure, contingent on ACMAS demonstrating its ability to recommence business operations in compliance with all relevant licensing obligations by the specified date. Failure to do so would have resulted in the cancellation of their licence.
Outcomes and Lessons Learned
The suspension of ACMAS’s AFS licence underscores the critical importance of maintaining compliance during and after changes in control. Despite plans to restart operations, ACMAS’s inability to meet licensing obligations led to the suspension, highlighting several key lessons for AFSL holders:
- Importance of Qualified Management: Ensuring that new management teams possess the necessary expertise and commitment to uphold AFS licensing standards is paramount. Ineffective management can jeopardise compliance and lead to severe regulatory actions.
- Robust Compliance Programs: Implementing comprehensive compliance programs that continuously monitor and address regulatory requirements can prevent lapses that might trigger enforcement actions. These programs should be integral during transitional periods to maintain adherence to financial services obligations.
- Proactive Engagement with ASIC: Maintaining open and proactive communication with ASIC can facilitate smoother transitions and provide opportunities to address potential compliance issues before they escalate. Engaging with regulatory bodies ensures that AFSL holders remain informed and compliant with evolving standards.
By internalising these lessons, AFSL holders can better navigate changes in control, ensuring continued compliance and safeguarding their licences from potential suspensions or cancellations.
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Conclusion
Maintaining compliance with reporting obligations is crucial for AFSL holders to avoid severe penalties and ensure the continuity of their financial services. Promptly notifying ASIC of any changes in control upholds transparency and accountability, which are fundamental to the integrity of the financial services sector.
Failure to adhere to these obligations can lead to significant consequences, including legal repercussions and potential suspension or cancellation of the AFSL. To ensure seamless compliance with these critical obligations and gain expert support, reach out to our AFSL Compliance & Regulation Lawyers at AFSL House today and discover how our specialised AFSL legal expertise provides the comprehensive guidance you need for accurate and timely change in control reporting.
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.
