Can ASIC Cancel My AFS Licence? Understanding ASIC’s Cancellation Powers

Introduction

Holding an Australian Financial Services Licence (AFSL) carries significant responsibilities and is subject to ASIC’s oversight and enforcement powers, including the powers to cancel and suspend AFSLs. ASIC, the Australian Securities and Investments Commission, plays a crucial role in regulating financial services businesses to protect consumers and maintain market integrity. Understanding the circumstances under which ASIC can cancel an AFSL is essential for all AFSL holders.

This article explores ASIC’s powers to cancel AFSL, outlining the grounds for cancellation, the factors ASIC considers, and the potential consequences. We’ll examine real-world examples of licence cancellations and provide answers to frequently asked questions to help AFSL holders understand their obligations and maintain compliance.

ASIC’s Legal Powers to Cancel an AFSL

ASIC has the authority to cancel an AFSL under specific circumstances. Depending on the situation, this cancellation can occur immediately or after a hearing. Below is an overview of ASIC’s powers and the conditions under which they may exercise them.

1. Immediate Cancellation Powers

ASIC can cancel an AFSL immediately, without a hearing, in certain situations. The circumstances vary depending on the licensee’s structure, whether it is a body corporate, partnership, individual, or trustee. For example, immediate cancellation may occur for a body corporate if:

• The body corporate ceases business operations.
• The entity becomes a Chapter 5 body corporate, meaning it enters external administration (e.g., liquidation or receivership).
• An officer of the body corporate is appointed as an insolvent under administration.
• The licensee fails to pay levies under the ASIC Supervisory Cost Recovery Levy Act 2017 for more than 12 months after the due date.
• The licensee does not provide a financial service covered by the licence within six months of receiving it.

Imagine a scenario where a company holding an AFSL to advise on securities ceases operations, ASIC could immediately cancel the licence. Similarly, if a licensee fails to pay their supervisory levies for over a year, ASIC may exercise its power to cancel the licence without delay.

These immediate powers allow ASIC to act swiftly in situations where the licensee’s continued operation poses risks to the financial system or its clients.

2. Cancellation After a Hearing

In most other cases, ASIC must provide a hearing before deciding to cancel an AFSL. This process gives the licensee an opportunity to present their case and make submissions. Grounds for cancellation after a hearing include:

• Non-Compliance with Obligations: The licensee fails to meet their obligations under s912A of the Corporations Act 2001 (Cth), such as maintaining adequate compliance systems or financial resources.
• Failure to Meet the ‘Fit and Proper Person’ Test: The licensee or a key representative no longer satisfies the fit and proper person requirements.
• Banning Orders: A banning order is issued against the licensee or one of its representatives.
• False or Misleading Information: The licensee provided false or misleading information in their licence application.

For instance, if a financial adviser holding an AFSL provides misleading advice to clients, ASIC may initiate a hearing to determine whether the licence should be cancelled. Another example is if a licensee fails to maintain the financial resources required under their licence conditions. In such cases, ASIC would hold a hearing to assess the situation before making a final decision.

This hearing process ensures procedural fairness, allowing licensees to respond to ASIC’s concerns and provide evidence in their defence.

Key Grounds for AFSL Cancellation

Non-Compliance with Licensee Obligations

ASIC can cancel an AFSL for non-compliance with licensee obligations under section 912A of the Corporations Act 2001 (Cth). These obligations encompass various aspects of running a financial services business, including:

• Maintaining adequate financial resources.
• Having appropriate risk management systems.
• Implementing robust compliance measures.
• Ensuring key personnel are fit and proper.
• Meeting reporting and notification requirements.

For example, consider a firm failing to lodge financial statements or comply with a condition on its licence. These breaches could lead to ASIC cancelling the licence. Another example is a firm not maintaining membership with the Australian Financial Complaints Authority (AFCA), a requirement for licensees.

Failure to Maintain Resources and Competence

ASIC may cancel a licence if a licensee fails to maintain adequate resources or demonstrate the competence to provide financial services. This includes having sufficient:

• Financial resources to meet operational needs and regulatory capital requirements.
• Human resources with the necessary skills and experience.
• Technological resources to support business operations and compliance.

For instance, if a firm lacks qualified staff to provide the financial services it’s licensed for, ASIC could cancel the licence. Similarly, inadequate technology to manage client funds securely could be grounds for cancellation. ASIC’s investigation into FXOpen AU Pty Ltd highlighted concerns about inadequate human resources and supervisory arrangements, leading to licence cancellation.

Inactivity or Cessation of Business

ASIC can cancel an AFSL due to inactivity or cessation of business, often without a hearing. If a licensee cannot commence operations within six months of receiving the licence, they may request an extension from ASIC. However, the licensee must notify ASIC within 15 business days after the six-month period ends. This notification must include:

• The reasons for the delay.
• The expected commencement date.
• Any changes to the intended financial services or products.
• How the licensee will continue to meet its obligations under the licence.

ASIC has actively enforced this power in recent cases. Several credit licences have been cancelled for reasons such as the cessation of credit activities or failure to commence operations within the required timeframe.

Key Grounds for AFSL Cancellation

ASIC has the authority to cancel an AFSL under specific circumstances, particularly when licensees fail to meet their obligations or demonstrate the capacity to operate effectively. Below are the key grounds for cancellation, incorporating relevant examples and details.

1. Non-Compliance with Licensee Obligations

ASIC can cancel an AFSL for non-compliance with licensee obligations under section 912A of the Corporations Act 2001 (Cth). These obligations encompass various aspects of running a financial services business, including:

• Maintaining adequate financial resources.
• Having appropriate risk management systems.
• Implementing robust compliance measures.
• Ensuring key personnel are fit and proper.
• Meeting reporting and notification requirements.

For example, a firm that fails to lodge financial statements or comply with a condition on its licence could face cancellation. Another example is a licensee failing to maintain membership with the Australian Financial Complaints Authority (AFCA), which is mandatory for licensees providing services to retail clients.

ASIC also considers breaches such as failing to maintain competence to provide financial services, inadequate supervision arrangements, or non-compliance with financial services laws.

2. Failure to Maintain Resources and Competence

ASIC may cancel a licence if a licensee fails to maintain adequate resources or demonstrate the competence required to provide financial services. This includes having sufficient:

• Financial resources to meet operational needs and regulatory capital requirements.
• Human resources, such as qualified responsible managers and competent representatives, to deliver licensed services.
• Technological resources to support business operations and compliance.

For example, if a firm lacks qualified staff to provide the financial services it is licensed for, ASIC could cancel the licence. Similarly, inadequate technology to securely manage client funds or ensure compliance could lead to cancellation.

The cancellation of FXOpen AU Pty Ltd’s licence serves as a notable example, where ASIC identified insufficient human resources and supervisory arrangements, demonstrating the importance of maintaining operational readiness.

3. Inactivity or Cessation of Business

ASIC has specific powers under section 915B of the Corporations Act 2001 (Cth) to cancel an AFSL due to inactivity or cessation of business, often without a hearing. This applies when a licensee:

• Does not commence providing financial services within six months of receiving the licence.
• Ceases carrying on its financial services business.

If a licensee cannot commence operations within the six-month timeframe, they may request an extension from ASIC. However, they must notify ASIC within 15 business days after the six-month period ends. This notification must include:

• The reasons for the delay.
• The expected commencement date.
• Any changes to the intended financial services or products.
• How the licensee will continue to meet its obligations under the licence.

ASIC actively enforces this power to ensure that inactive or non-operational licensees do not remain in the system unnecessarily.

Case Study: FXOpen AU Licence Cancellation

On 4 September 2024, ASIC cancelled the AFSL of FXOpen AU Pty Ltd (FXOpen AU), a provider of contracts for difference (CFDs) and foreign exchange contracts. The cancellation followed an investigation that uncovered significant deficiencies in FXOpen AU’s operations and compliance with its obligations as an AFSL.

Key Findings from ASIC’s Investigation

ASIC’s investigation revealed several serious issues with FXOpen AU’s ability to meet its obligations under its AFSL. These included:

• Inadequate Human Resources and Supervisory Arrangements: FXOpen AU lacked the necessary personnel and oversight systems to effectively provide financial services.
• Failure to Maintain Competence: The company failed to demonstrate the competence required to provide financial services under its licence.
• Non-Compliance with the ‘Key Person’ Condition: FXOpen AU did not adhere to the key person condition specified in its licence, which is critical for maintaining organisational competence.
• Breach of Financial Services Laws: FXOpen AU failed to comply with core financial services laws, further undermining its ability to operate effectively.

These failures significantly impacted FXOpen AU’s ability to provide financial services in a manner that met regulatory standards.

ASIC’s Decision to Cancel the Licence

ASIC determined that FXOpen AU’s failure to comply with its core obligations warranted the cancellation of its licence. The decision was made to:

• Protect Clients: Safeguard both existing and future clients from potential harm due to further breaches.
• Deter Non-Compliance: Send a strong message to other AFSL holders about the importance of meeting their regulatory obligations.
• Promote Integrity in Financial Services: Reinforce fairness, honesty, and professionalism in the provision of financial services, while supporting informed participation by investors and consumers in the financial system.

ASIC’s cancellation of FXOpen AU’s licence highlights the regulator’s commitment to ensuring compliance with financial services laws and protecting consumers from potential harm. This case serves as a reminder to all AFSL holders of the critical importance of maintaining adequate resources, meeting licence conditions, and adhering to regulatory standards.

Factors ASIC Considers When Deciding to Cancel an AFSL

When deciding whether to cancel an AFSL, ASIC evaluates several key factors. These considerations help ASIC determine the appropriate course of action to protect consumers, uphold regulatory standards, and maintain the integrity of the financial services industry. Below is a structured breakdown of the factors ASIC assesses.

1. Nature and Seriousness of Misconduct

ASIC examines the severity of the licensee’s compliance breaches, focusing on the nature of the misconduct and its underlying intent. Key considerations include:

• Intentional, Reckless, or Negligent Conduct: Misconduct that is deliberate or reckless is treated more seriously than unintentional errors. For example, a licensee who deliberately misappropriates client funds will face harsher consequences than one who makes an isolated administrative mistake.
• Impact of the Misconduct: ASIC assesses the extent of harm caused to investors and consumers. Misconduct that results in significant financial losses or undermines trust in the financial system is viewed more critically.
• Duration and Frequency: Isolated incidents are treated differently from systemic or persistent breaches. A pattern of repeated non-compliance suggests deeper issues within the licensee’s operations.

ASIC’s evaluation of the misconduct’s nature and seriousness helps determine whether licence cancellation is necessary to prevent further harm.

2. Impact on Investors and Consumers

The potential or actual harm caused to clients is a critical factor in ASIC’s decision-making process. This includes both financial and non-financial impacts, such as reputational damage or loss of trust. ASIC considers:

• Number of Clients Affected: A larger number of impacted clients increases the likelihood of licence cancellation.
• Magnitude of Financial Losses: Significant financial losses to clients weigh heavily in ASIC’s assessment.
• Potential for Harm: Even if no direct financial loss occurs, ASIC evaluates the potential for harm caused by the licensee’s actions.

For instance, a licensee whose actions cause widespread financial losses to clients is more likely to face cancellation. However, even in cases where financial harm is avoided, ASIC may still act if the licensee’s conduct poses a risk to consumer protection or market integrity.

3. Compliance History and Remedial Actions

ASIC reviews the licensee’s past behaviour and their approach to addressing compliance issues. This includes:

• History of Non-Compliance: A licensee with a track record of breaches is more likely to face cancellation than one with an otherwise clean compliance history.
• Remedial Actions Taken: ASIC assesses whether the licensee has taken timely and effective steps to address breaches. A licensee who promptly rectifies issues and implements measures to prevent recurrence is viewed more favourably.
• Proactive vs. Reactive Compliance: Licensees who proactively address compliance risks and maintain strong internal controls are less likely to face cancellation. Conversely, those who only react to problems after they arise are viewed less favourably.

For example, a licensee who identifies and resolves compliance issues before they escalate demonstrates a commitment to regulatory standards, which may mitigate the risk of licence cancellation.

Conclusion

This article has explored ASIC’s power to cancel AFSLs, emphasising the importance of compliance for licence holders. Understanding these powers and maintaining compliance are crucial for all AFSL holders to avoid potential licence cancellation and uphold the integrity of their financial services business.

For support in navigating the complexities of AFSL compliance and mitigating the risk of cancellation, AFSL holders are encouraged to connect with our AFSL lawyers at AFSL House. We offer specialised compliance & regulatory guidance and resources to help you understand and adhere to ASIC’s requirements, ensuring the ongoing integrity and compliance of your financial services business.

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.