“So if you want me off your back
Well, come on and let me know
Should I stay or should I go?”
— The Clash, “Should I stay or should I go?”, Joe Strummer / Mick Jones
Choices, obligations and costs
At the risk of stating the obvious, 2019 has been a difficult time for advisers. Admittedly, it hasn’t been a much better year for many licensees.
In addition to the unwanted scrutiny of the Royal Commission, remediation costs, increasing regulatory scrutiny and declining margins, the long-anticipated fragmentation of the institutional advice groups has started to gather speed.
Few of the larger licensees have closed with the unseemly haste evidenced by Dover. While most have provided definite closure dates, they’ve also provided subsidised services or exit payments to mitigate adviser’s anger. The $10,000 allegedly offered to departing Financial Wisdom practices seems consistent with the generosity of their competitors.
The issue for those advisers suddenly cast adrift of their institutional licensees is whether, and how, to continue to provide financial product advice in an increasingly complex and complicated environment.
We are frequently consulted by advisers grappling with this existential question.
We remain convinced of the value of financial advice and the significant consumer benefits it provides. We also believe in the inevitable emergence of an advice profession, but we don not believe that every adviser, or practice, has the competence or capability to hold an Australian Financial Services License and comply with the laws and their license conditions.
In fact, if recent events have shown us anything, it’s that even large, well-resourced licensees can struggle to do this.
Understand your options
“Alice: Would you tell me, please, which way I ought to go from here?
The Cheshire Cat: That depends a good deal on where you want to get to.
Alice: I don’t much care where.
The Cheshire Cat: Then it doesn’t much matter which way you go.”
— Lewis Carroll, Alice in Wonderland
If you find yourself in the position of trying to find a path forward, you know that you have a dazzling array of choices (whose appeal often depends on the financial interests of those presenting them).
As ethical professionals, we think whatever decision you make has to be the result of your “free, informed and prior consent” – so we’ll do our best to objectively lay out your choices, their costs and implications.
- Authorisation. It may seem counter-intuitive to respond to your ejection from a (collapsing) licensee by joining another licensee but it’s not always a matter of ‘any port in a storm’. There are some exceptional licensees that have the resources, leadership and expertise to provide you with the authority, support and assistance to continue to provide financial product advice. Please choose carefully and avoid any that see compliance as a problem to be avoided, have inadequate resources or restrict you to in-house products. A good licensee will provide you with the leadership, compliance and competent services you need to prosper. It should also provide you with time and convenience by removing from you the burdens of running a licensee in a complex and complicated regulatory environment. The cost of an authorisation tends to sit around $30,000 pa but this depends on the licensee, the services provided and whether Professional Indemnity is included. If you need to be pointed in the direction of some appropriate licensees, email firstname.lastname@example.org.
- Employment. It may not suit every adviser, but there are a number of highly competent licensees that have chosen to manage the risks and costs of intermediated distribution by employing, and directly managing, advisers. Industry funds, accounting practices and some small to medium licensees operate using this model. While they may be more restrictive than other licensees, they are often better resourced and possessed of a more realistic risk appetite. They’ll either employ highly experienced risk and compliance staff or engage professional firms to provide objective advice and support. These salaried positions cost you nothing but your willingness to operate efficiently, honestly and fairly as an employee of the Licensee.
- Self-licensing. Being a good adviser doesn’t necessarily equip you to run an efficient practice nor does it necessarily prepare you to manage an AFSL. The obligations, and the costs of non-compliance, are significant. On the other hand, if you’re an ethical professional with management skills and appropriate education, resources and experience, this may be an option. Don’t choose this option if your motivation and focus is purely financial. Few licensees make a profit and, with the loss of grandfathered benefits, more licensees will struggle to deal with increasing requirements and declining margins. Scaling generates opportunities but, as has been recently demonstrated, can often generate significant liabilities. If you are an ethical, disciplined and ‘independently-minded’ advice professional, this may be the best option for you (but appreciate the significant costs and obligations). We’ll outline the indicative costs below, but appreciate there are ways to mitigate these costs – by outsourcing, implementing a shared-services model with other advisers, making lateral shifts or by embracing technology. If you’d like advice, email us.
The road to self-licensing
“Two roads diverged in a wood, and I—
I took the one less traveled by,
And that has made all the difference.”
— Robert Frost, “The road less taken”
If you are considering self-licensing, start by reading ASIC Regulatory Guide 36 “Licensing: Financial product advice and dealing” and Regulatory Guide 244 “Giving information, general advice and scaled advice”. You should read these even before assessing your competence and capacity (including your proposed representatives) or designing your structure.
If you don’t obtain professional legal or accounting advice at this point, at least undertake a cost/benefit analysis to assess your choices and their costs.
Although it may be tempting to delegate regulatory compliance to an external expert, its critical that you read the following regulatory documents:
- Regulatory Guide 104 “Licensing: Meeting the general obligations”. This Guide addresses compliance and risk management, monitoring and supervision, training and the technological and human resources needed to demonstrate compliance with your general obligations.
- Regulatory Guide 105 “Licensing: Organisational competence”. This Guide addresses organisational competence and introduces Responsible Managers – those persons on whom the licensee will rely to operate efficiently, honestly and fairly. You’ll need to nominate appropriate Responsible Managers to cover the authorisations you’ll seek for your licence, so understand who and what you’ll need before you commence your application.
- Regulatory Guide 126 “Compensation and Insurance Arrangements for AFS Licensees” . This deals with insurance and compensation requirements. You should also read Regulatory Guide 167 “Licensing: Discretionary powers and transition “ to understand ASIC’s position on security bonds and professional indemnity insurance. If you need context, read this article about ASIC’s review of these requirements. Better yet, skip to the punchline by reading AFSL Fundamentals: A quick guide to Professional Indemnity;
- Regulatory Guide 146 “Licensing: Training of financial product advisers.”. This may be under review but it addresses the skills, training and education required by financial advisers. Remember that FASEA also have a significant interest in adviser competence and acceptable professional development.
- Regulatory Guide 165 “Licensing: Internal and external dispute resolution”. Like most advisers, you’ve probably never received a complaint but this may be due mainly to luck or poor classification. Understand ASIC’s expectations (including AFCA membership) so that you’re not unpleasantly surprised.
- Regulatory Guide 166 “Licensing: Financial requirements” deals with solvency, cash flow and capital adequacy. A sustainable business needs to be both solvent and compliant so make sure you’ve got the financial resources to obtain and maintain your licence.
- Regulatory Guide 168 “Product Disclosure Statements (and other disclosure obligations)” and Regulatory Guide 169 “Disclosure – Discretionary Powers” both provide useful insights into ASIC’s expectations of how licensees should approach conduct and disclosure issues. They’re both important, but Regulatory Guide 175 “Licensing: Financial product advisers – Conduct and disclosure” is the most critical Guide for advisers and advice businesses. Don’t overlook the importance of REP515 either. It may focus on large licensees, but the appendices contain a trove of useful information for compliance-focused licensees. It’s worth scanning Regulatory Guide 182 “Dollar Disclosure” at this point too.
- Regulatory Guide 181 “Licensing: Managing Conflicts of Interest” outlines the principles for managing conflicts of interest in a way consistent with the law and your licence obligations. It may be inconsistent with the FASEA Code of Ethics, but it’s still the best regulatory guide for managing perennial issues plaguing the financial services industry.
- Regulatory Guide 234 “Advertising financial products and services (including credit): Good practice guidance” might not have an immediate application but it will become important once you start to contemplate your marketing and media strategy.
Of course, the more determined applicants will also try to familiarise themselves with the relevant International Standards. ISO 19600:2014, “Compliance management systems” and ISO 31000 “Risk management” are the most relevant.
It’s at this point, and hopefully after taking advice, that you’ll contemplate the most effective way to manage your application. Even for novices, the application process is manageable but using an external provider like Assured Support may save you time, stress and unnecessary aggravation – we’ll also help you design a compliance framework likely to ensure your compliance with your obligations under s912A of the Corporations Act 2001.
The indicative costs listed below are based on feedback and research. The indicative fees tend to reflect services provided to small and medium firms by established businesses in key capital cities. The costs for single-adviser licensees and medium to large licensees may be significantly different to the approximation or range presented below. Please appreciate that the price range for these services can vary enormously between providers. If you’d like a more detailed perspective, contact us.
Costs are subject to the nature, scale and complexity of the proposed business and the level of project management and advice required.
Professional Fees: AFSL Application
Exercise caution when selecting providers and don’t confuse cost with value. Some providers will manage and submit your application without providing you with framework documents you’ll need to support your application.
This is a variable cost based on cover, activity and history.
Approximately 2.2% of revenue.
Assume minimum premium of $16,000 pa
Professional Indemnity Insurance
$1500 + $907 per adviser in 2019.
$360 to 30/09/2019 then membership + levy
Subject to size, structure and complexity
Ranges from $2,233-$7,357
Statutory Lodgement Costs (AFSL Application fees)
These costs will depend on the provider engaged and the size and complexity of the advice business.
Approximately $4,000-$6,000 pa
Depends on review scope, report quality and reviewer capability
Approximately $1650-2,200 per adviser/year
Read Adviser Reviews
Adviser Reviews (compliance audits)
A Compliance ‘health-check’ and assurance of the Licensee’s compliance and compliance arrangements.
We recommend our clients undertake this review every 3-5 years.
Independent, expert and assured support to ensure you continue to comply with the financial services laws.
Cost varies according to AFSL’s specific needs, numbers and activities.
Assume $6,000-$8,000 pa for small licensee with few representatives.
CAVEAT: There are additional compliance services, such as pre-vetting, training or access to compliance technology that will be additional costs. The development of your compliance framework – the measures, processes and procedures that ensure your compliance with the laws – will also be additional costs.
External Compliance Support
Be wary of Compliance Manuals offered as part of the licensing application process or support contract. In our experience, they tend to be generic documents that simply restate the legislation and regulation. A Compliance Manual that is not customised to your business exposes you to increased regulatory risk.
Appointing an Authorised Representative costs $48. Amending an Authorised Representative’s details or ceasing an Authorised Representative costs $31.
BONUS: After your AFS licensee is first approved, you have 10 business days during which you can appoint Authorised Representatives without incurring any fees.
Statutory Fees (ASIC charges)
The cost of these services depends on the provider, the number of users and the scope of the services they are required to provide. Thankfully, the presence of alternative providers helps to keep costs competitive. In addition, it’s possible to obtain discounts through some associations or corporate groups.
Technology (On-line training, Research and Planning Software)
Help is at hand
There’s little doubt that the costs of obtaining and maintaining an Australian Financial Services License are significant. They should be. Licensing, given the resources and capabilities required, should not be an option for those industry participants who lack the competence, capability or culture to operate “efficiently, honestly and fairly”.
It’s important not to confuse cost with value.
Although the financial costs may be high, they are not impossibly high, and need to be weighed against the benefits and opportunities self-licensing provides you. It bears repeating that if you are an ethical, organised advice professional, self-licensing may be the best way to protect your personal brand and your clients’ interests.
If you decide to head down the road to self-licensing, having the company of an experienced and expert guide can make all the difference. We’re here for you.