Financial Services Licences and Accountants Life after 30th June 2016 and why you need to act now

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1 November 2015 Financial Services Licences and Accountants Life after 30th June 2016 and why you need to act now Q. Why do I need to get an AFS Licence now when I have been servicing my SMSF clients very well for the last 15 years? A. The accountants exemption from the requirement to hold an Australian Financial Services Licence when providing advice and dealing services to retail clients in relation to SMSF will expire 30th June Merely suggesting to a client that they allocate funds to a SMSF or establish a SMSF can be seen to be providing financial product advice. You don t want to restrict what you have been doing for the last 15 years and there is a need to act quickly to ensure you can legally continue to provide advice your clients expect. The provision of independent quality advice by accountants through an Australian Financial Services Licence is viewed as a way to enhance investment in the real economy, improve retirement incomes and deliver better outcomes for consumers of financial services. It s now law. You need it by June 30th 2016 to continue to advice and deal on behalf of these clients. It has been reported that more than half of the Australian Financial Services Licence ( AFS Licence ) applications submitted to ASIC by accountants have been either withdrawn by the applicant or were administratively returned to the applicant because they were incomplete, defective, inadequate or incapable of assessment by ASIC 1. This is most likely explained by the fact that these applications are being viewed as just box ticking exercises. Licensees need to have an understanding of their key obligations under section 912A 912F of the Corporations Act. Although there is some homework in preparing a business plan, up to date financials and providing evidence of accreditation by CA, IPA or CPA to accompany the application, the ultimate benefits of seeking assistance in its preparation, lodgement and ongoing compliance, could outweigh those of withdrawing or by becoming an authorised representative of somebody else s AFS Licence. The SMSF sector has undergone substantial change and growth since the 1997 Wallis Report. Since the Wallis Report, the SMSF sector has grown from 138,000 excluded funds with $26 billion of assets to its current size of approximately 522,000 SMSFs with $543 billion of assets. Holding close to one third of Australia s retirement savings, SMSFs are an integral part of Australia s financial system. Accordingly, our submission focuses on how SMSFs can best contribute to the financial system and how to ensure the financial system can best deliver results for consumers. Future of Financial Advice ( FOFA ) is a government approved regulatory framework brought in to improve the quality of financial advice and consumer outcomes as a result of the failures of financial firms in the late 2000 s. As a result the accountants exemption provided by Regulation A of the

2 Corporations Regulations 2001 will be scrapped from July The current exemption allows accountants to provide self managed superannuation fund ( SMSF ) advice without holding an AFS Licence in their own right or being an authorised representative of a licensee. The new regulations provide alternative arrangements for accountants in that they will be eligible to receive a streamlined limited AFS Licence, if they can prove they are a public practising accountant certified through CA, IPA or CPA. The limited AFS Licence terms accountants exempt in that they will be authorised to give: financial product advice to SMSFs; financial product advice on superannuation products in relation to a person s existing holding but only to the extent required to: make a recommendation that the person establish a SMSF; or provide advice to the person on contributions or pensions under a superannuation product In addition, the new limited AFS Licence will allow accountants and other advisers to provide financial advice on SMSF and class of product advice in the following five product areas: Superannuation products Securities Simple managed investment schemes General and life insurance and Basic deposit products Class of products advice means financial products advice about a class of products but does not include a recommendation about a specific product in the class 3. For example, you can give general financial advice about a term deposit but you cannot make specific recommendations that a person deposit their money into a term deposit product offered by a particular bank or building society. Lastly, accountants will be authorised to arrange to deal in a SMSF. If an accountant wants to proceed down the path of applying for an AFS Licence that does not relate to the provisions outlined for the Limited AFS Licence, then all the requirements under the Regulatory Guides RG 105 (skill and knowledge), RG 166 (financial statements) and RG 104 (general obligations) apply. This is a Full AFS Licence. Accountants must accept that whether they choose to apply for a Full ASF Licence or a Limited AFS Licence, there are policies and procedures under 912 (A) 912 (F) of Corporations Act (2001), outlined below, that need to followed by all AFS licensees.

3 General obligations under Part 7.6, Division 3, section 912 (A F) Description Licensee Obligation Section Efficiently, honestly and fairly Conflict of interest Do all things necessary to ensure that the financial services covered by the AFSL are provided efficiently, honestly and fairly Have in place arrangements for managing conflicts of interest s. 912A(1)(a) s. 912A(1)(aa) Licence conditions Comply with the conditions on the AFS Licence s. 912A(1)(b) Financial services laws Supervision of representatives Have adequate resources Organisational competence Training of representatives Dispute resolution Risk management Compensation Provide a statement to ASIC Breach reporting Assist ASIC in surveillance checks Cite licence number Comply with the financial services laws including the conduct and disclosure obligations in Chapter 7 of Corporations act 2001 Take reasonable steps to ensure that representatives comply with the financial services laws Have available adequate resources including financial, technological and human resources to provide the financial services covered by the AFS Licence and to carry out supervisory arrangements (unless regulated by APRA) Maintain the competence to provide the financial services covered by the AFS Licence Ensure that representatives are adequately trained, and are competent, to provide the financial services covered by the AFS Licence If providing financial services to retail clients, have in place a dispute resolution system Have adequate risk management systems (unless APRAregulated) according to ISO Have arrangements for compensating clients for loss or damage due to breaches by the licensee or its representatives (unless regulated by APRA) On request, provide ASIC with a written statement about the financial services provided or the business being carried on Report to ASIC significant breaches of AFS Licence obligations Assist ASIC in its investigations into whether the licensee is complying with the financial services laws (e.g. by showing ASIC the licensee s books or giving other information) Cite the AFS Licence number in specified documents s. 912A(1)(c) s. 912A(1)(ca) s. 912A(1)(d) s. 912A(1)(e) s. 912A(1)(f) s. 912A(1)(g) s. 912A(1)(h) s. 912B s. 912C s. 912D s. 912E s. 912F

4 It seems the major issue is that accountants are having problems setting up such procedures within their businesses to cater for living under the Financial Services Licence regime. Whilst an AFS Licence application is not a simple box ticking exercise, this doesn t mean that it is especially onerous if approached correctly. Given some initial guidance from experienced compliance managers, accountants can have their core proof business plan (according to RG 1, 2 and 3) constructed to coincide with their financial statements and forecasts (according to RG 166) and evidence of their public practising certificate (replacing skill and knowledge component under RG 105 in the first 3 years of having the Limited AFS Licence) granted under the limited AFS Licence concessions 2. Once these core proofs and documentation have been provided, it is then for the accountants to maintain a compliance and training regime in line with ASIC s guidelines. The current options for accountants who wish to operate in the SMSF industry are becoming limited as we approach the deadline. The two practical options are 1) apply for a limited AFS Licence or 2) become an authorised representative or another licensee. The alternative of being an authorised representative ( AR ) under another licensee does not alter nor diminish the accountants responsibilities to adhere to the above mentioned policies, maintain their compliance regime under section 912A F Corps Act and be prepared to demonstrate this to either the regulator ASIC, or to their licensee. This will definitely be the case if official complaints which trigger mandatory investigation by ASIC are made. Moreover, any licensee has the ability to request the AR divulge their entire business practices as the licensee carries the ultimate risk in authorising a representative. Seeking initial advice on how to set up the application, working with an independent compliance manager to retain independence in the compliance function and being the licensee can be an effective, professional and cheaper option for accountants to run their financial services business.

5 References: 1 Accountants Daily 2015: news/8152 asic discloses latest limited licensing%20 figures?utm_source=accountants+daily&utm_campaign=accountants_daily_newsletter21_04_ 2015&utm_medium= 2 SMSF Professionals Association of Australia. Financial System Inquiry Submission 2014, page 3. 3 Explanatory Statement: Future of Financial Advice. Issued by authority of Minister for Financial Services and Superannuation: s/accountant_explan_state.rtf Further information Please ask either your regular Pitcher Partners contact or any of the contacts below for further details on the issues raised in this CPN Bulletin: Author Pitcher Partners Melbourne Robert Payne Managing Director Andrew Clugston Guildfords Business Consultants Pty Ltd Partner Business Advisory & Assurance robert@guildfords.com.au andrew.clugston@pitcher.com.au DISCLAIMER: This bulletin is intended to provide a general summary only and should not be relied on as a substitute for professional advice.