What Happens & What To Do If an AFSL Key Person Leaves

Introduction

Key persons are crucial for Australian Financial Services Licence (AFSL) businesses, ensuring that the licensee maintains the required organisational competence to provide financial services effectively. The departure of a key person can significantly impact the licensee’s ability to uphold its financial services obligations and may trigger actions from the Australian Securities and Investments Commission (ASIC), such as the imposition of key person conditions.

This guide provides the necessary insights and practical approaches to help AFSL businesses understand these potential impacts and the necessary steps to manage such departures to maintain compliance and organisational competence.

Understanding the Key Person Condition

Definition and Purpose

The Key Person Condition is a stipulation imposed by ASIC on an Australian Financial Services Licence (AFSL) when the licensee is heavily dependent on one or two responsible managers to demonstrate organisational competence. This condition ensures that the AFSL holder maintains the necessary expertise and decision-making capabilities to provide financial services effectively. By enforcing this condition, ASIC aims to uphold the integrity and competence of financial service providers, thereby protecting the interests of clients and maintaining market stability.

ASIC’s Criteria for Imposing the Condition

ASIC assesses the necessity of imposing a Key Person Condition based on several criteria related to the licensee’s reliance on specific responsible managers. Key factors include:

• Dependency on Specific Responsible Managers: If an AFSL holder relies significantly on the skills, qualifications, and experience of one or two responsible managers for managing financial services and making critical decisions, ASIC may impose the condition.
• Organisational Competence: The ability of the remaining responsible managers to cover all financial services and products authorised under the licence. If expertise is concentrated in limited individuals, indicating potential vulnerabilities in organisational competence, ASIC is likely to impose the condition.
• Succession Planning: The presence of a robust succession plan to promptly replace key responsible managers in case of their departure. A lack of such planning can prompt ASIC to enforce the condition to mitigate risks associated with sudden vacancies.
• Compliance with Regulatory Guide 105: Adherence to ASIC’s Regulatory Guide 105, which outlines the requirements for maintaining organisational competence, including having responsible managers with appropriate knowledge and skills.

By evaluating these factors, ASIC ensures that licensees are prepared to maintain continuous and competent financial service provision, even in the event of key individuals leaving the business.

Obligations When a Key Person Leaves

Notification Requirements to ASIC

When a key person departs from an AFSL business, the licensee is obligated to notify ASIC in writing within five business days. The notification must include the following details:

• Departure Date: Specify the exact date the key person ceased to be an officer or perform duties on behalf of the licensee.
• Replacement Details: If a replacement responsible manager has been appointed, provide their name, address, date of commencement, educational qualifications, and relevant experience.
• No Replacement Appointed: If no replacement has been nominated, include detailed reasons explaining why a new responsible manager has not been appointed.
• Compliance Plan: Outline a detailed description of how the licensee will continue to comply with the conditions of the license and relevant Corporations Act 2001 (Cth) obligations following the departure of the key person.

Required Forms and Documentation

In addition to the written notification, AFSL licensees must promptly use the ASIC Regulatory Portal to formally lodge any changes. This online system replaces the previous process of submitting separate forms. The required online “transactions” include:

• Variation Application: To appoint a new responsible manager as a key person or to vary your Australian Financial Services Licence to remove the key person condition, you must lodge a variation application. This must be submitted within 5 business days of the key person’s departure and supersedes the former Form FS03.
• Notification of Responsible Manager Change: To formally appoint or cease a responsible manager, you must complete the ‘Notify change of responsible manager details’ transaction. This must be submitted within 10 business days of the appointment or cessation and replaces the former Form FS20.

Timely completion of these online transactions is crucial to avoid potential penalties and ensure the licensee remains compliant with ASIC regulations.

Impact on the AFSL Business

Organisational Competence

The departure of a key person can significantly impact an AFSL business’s organisational competence. Organisational competence refers to the licensee’s ability to provide the financial services and products covered under their license effectively and in compliance with regulatory standards.

When a key person leaves, the AFSL may become heavily dependent on remaining responsible managers to demonstrate the necessary knowledge and skills. This dependency can jeopardise the licensee’s ability to meet ASIC’s requirements, potentially leading to a reassessment of the licensee’s overall competence.

Key aspects affected include:

• Knowledge and Skills Distribution: The remaining responsible managers must collectively cover all areas of financial services and products offered.
• Decision-Making Capacity: With fewer responsible managers, the licensee may struggle to handle significant day-to-day decisions effectively.
• Succession Planning: A robust succession plan is essential to ensure that competencies are maintained and that there is no gap in expertise when a key person departs.

Failing to address these areas promptly can undermine the AFSL’s operational stability and its ability to provide consistent financial services.

Potential Consequences from ASIC

If ASIC determines that the AFSL no longer maintains sufficient organisational competence following the departure of a key person, several consequences may ensue. These actions are designed to protect the integrity of the financial services industry and ensure that only competent licensees operate within it.

Possible outcomes include:

• Removal of Authorisations: ASIC may revoke specific authorisations on the AFSL if it assesses that the licensee cannot demonstrate competence in certain areas.
• License Suspension or Cancellation: In severe cases, if the licensee is deemed incapable of maintaining organisational competence across all required areas, ASIC has the authority to suspend the AFSL or even cancel the AFSL altogether.
• Imposition of Additional Conditions: ASIC may impose further conditions on the AFSL to mitigate risks associated with the reduced competence.

These potential actions highlight the critical importance of maintaining organisational competence and ensuring that any changes in key personnel are managed effectively to comply with ASIC’s regulatory expectations.

Steps to Mitigate the Effects of a Key Person Departure

Appointing a Replacement Responsible Manager

When a key person departs, it is crucial for the AFSL licensee to promptly appoint a replacement responsible manager to maintain organisational competence. The process involves several key steps:

1. Identify a Qualified Candidate: The replacement must possess appropriate qualifications, experience, and knowledge relevant to the financial services and products covered by the AFSL.
2. Lodge Required Online Transactions: The licensee must use the ASIC Regulatory Portal to:
   • Lodge a variation application to appoint another responsible manager as a key person. This transaction, which replaces the former Form FS03, must be submitted within 5 business days of the key person’s departure.
   • Complete the ‘Notify change of responsible manager details’ transaction to add the new responsible manager. This, replacing the former Form FS20, must be submitted within 10 business days of their appointment.
3. Ensure Compliance with RG 105: The responsible manager must meet the competence requirements outlined in Regulatory Guide 105, demonstrating they have the necessary skills and knowledge to fulfil their role effectively.

By following these steps, the licensee ensures a smooth transition and continues to meet ASIC’s organisational competence standards.

Varying the AFSL to Remove the Condition

Once your business has grown and you have appointed additional responsible managers, you can apply to vary the license and remove the Key Person condition, demonstrating that you are no longer heavily reliant on one individual. The process includes:

1. Prepare a Variation Application: Initiate and complete an online variation application through the ASIC Regulatory Portal, formally requesting the removal of the Key Person condition. This online transaction replaces the previous paper-based Form FS03.
2. Provide Supporting Information: The application will require you to provide details of your current responsible managers and demonstrate how organisational competence is now maintained across the team without the need for a key person condition.
3. Lodge and Await ASIC’s Decision: Submit the application via the portal. ASIC will review the information to ensure that the licensee no longer relies heavily on a single individual and that all competence requirements are satisfied before approving the removal of the condition.

Successfully varying the AFSL to remove the Key Person condition restores full operational flexibility and signifies to ASIC that a robust governance structure is in place.

Preventative Measures

Nominate Multiple Responsible Managers

Appointing multiple responsible managers ensures that your AFSL is not overly reliant on a single individual, thereby maintaining organisational competence even if one key person leaves. By distributing responsibilities among several managers, each can cover different areas of financial services and products authorised under your licence.

Key benefits of nominating multiple responsible managers include:

• Enhanced Coverage: Each responsible manager can specialise in specific financial services or products, ensuring comprehensive oversight.
• Risk Mitigation: Reducing dependency on a single manager minimises the impact of unexpected departures, maintaining continuous service provision.
• Operational Stability: Multiple managers can share the workload and decision-making responsibilities, promoting a balanced and resilient organisational structure.

For example, if your AFSL covers both financial planning and investment services, appointing one responsible manager to oversee financial planning and another to manage investment services can ensure that both areas remain competent and compliant.

Develop Succession Plans

Establishing a robust succession plan is crucial for maintaining organisational competence and ensuring a smooth transition when a key person leaves your AFSL. A well-designed succession plan outlines the process for replacing responsible managers, reducing the risk of operational disruptions.

Key elements of an effective succession plan include:

• Identification of Successors: Clearly identify potential candidates within or outside the organisation who can step into responsible manager roles.
• Training and Development: Provide necessary training and professional development to candidates to ensure they meet ASIC’s competence requirements.
• Documentation: Maintain detailed records of succession plans, including timelines and criteria for selection, to demonstrate readiness to ASIC.

For instance, suppose a responsible manager specialising in compliance unexpectedly resigns. In that case, the succession plan should have a designated individual ready to assume the role, ensuring that compliance oversight continues without interruption.

Implementing these preventative measures not only safeguards your AFSL’s compliance but also enhances the overall resilience and reliability of your financial services business.

Conclusion

Maintaining organisational competence is crucial for AFSL businesses, and key persons play a vital role in ensuring compliance with ASIC’s requirements and avoiding triggering AFSL audits and investigations. When a key person leaves, promptly notifying ASIC and appointing a replacement responsible manager are essential steps to uphold the licensee’s obligations.

Implementing effective succession plans and nominating multiple responsible managers can mitigate the risks associated with key person departures. To mitigate these risks and ensure ongoing compliance, we encourage you to connect with our AFSL compliance lawyers at AFSL House. We provide expert guidance on managing these transitions and can help you maintain organisational competence and protect your AFSL.

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.