ASIC is coming for your responsible managers

A key obligation of an AFSL holder is to maintain the competence to provide the financial services covered by its licence.[1] ASIC refers to this obligation as the “organisational competence obligation.” In order to comply with this obligation, Regulatory Guide 105: Licensing: Organisational competence (RG 105) provides that the licence holder must nominate Responsible Managers (RMs) who have the appropriate knowledge and skills for all of the licence’s financial services and products.[2] Therefore, RMs are critical in ensuring that the AFSL complies with its organisational competence obligation from the time they are granted the licence, and on an ongoing basis.[3]

RMs will have direct responsibility for significant day-to-day decisions about their respective financial services businesses, except for some RMs of small-scale, heavily automated businesses.[4] Further, RMs must be a fit and proper person and possess the appropriate knowledge and skills for the financial services and products that their role relates to.[5]

With ASIC cracking-down on RMs, it is pertinent that licence holders ensure that nominated RMs have the capacity and skills to perform their role effectively.

ASIC enforcement action

Recently, ASIC has initiated enforcement action against RMs who they believe are inadequately performing their duties. For example, ASIC banned Queensland RM Albert Christen Walters from performing the functions of a RM of a financial services business for four years because he was “not competent” and was “not a fit and proper person to perform these roles.”

Specifically, Mr Walters failed to monitor and oversee his business, and failed to ensure compliance with financial services law. ASIC expects RMs to be actively involved in their licensee’s financial services businesses. As a result, when Mr Walters ceased to be involved with the business, ASIC concluded that he should have organised a replacement RM to ensure the necessary oversight was provided.

Further, ASIC also banned the former RM of Sirius Financial Markets Pty Ltd, Mark Bringans, for eight years after finding that he was inadequately trained and incompetent. Moreover, ASIC found that he was “not a fit and proper person to provide financial services” and that he was a “disinterested, disengaged responsible manager who did little more than attend monthly compliance meetings.” It is likely that many RMs will be in a similar position.

Notably, Mr Bringans has applied to the Administrative Appeals Tribunal for a review of ASIC’s decision, but his application to stay the implementation of the banning order was refused.

Therefore, if you currently hold an AFSL, or you are thinking of applying for one, you should consider whether your RMs are competent, and fit and proper persons to perform the relevant duties.

Nominating an RM

The nature, scale and complexity of your business will dictate who you nominate as RMs as well as the number of RMs required. [6] Although it is general industry practice to nominate two RMs, you should consider the number of investors you have as well as the number of representatives who provide financial services on your behalf.[7]

Further, ASIC will only accept RMs who have experience in the authorisations and products sought by the AFSL. For example, if you operate a registered managed investment scheme, your RMs must demonstrate that they understand the investment and operational issues of the assets under management.[8]

Ultimately, the more complex and large your business, the more RMs will likely be required and their experience will need to be greater.

Knowledge and skills

As a licence holder, you need to demonstrate that each nominated RM meets one of the five options for demonstrating appropriate knowledge and skill and that together, the RMs nominated have appropriate knowledge and skills to cover all of licence’s financial services and products.

The below table is extracted from RG 105 and demonstrates the five options for demonstrating knowledge and skills of RMs. Notably, RMs must meet both components of an option.

If you are relying on Option 5, your written submission must explain:

1. the nature of your RMs role;
2. any relevant qualifications or courses they have completed;
3. their relevant experience over the past 10 years (this does not necessarily mean they need 10 years relevant experience);
4. any relevant credentials they have, including professional association membership or affiliation, or skills or knowledge recognised by an industry association, a regulatory body such as APRA, or some relevant overseas body; and
5. why you think they have appropriate knowledge and skills for the financial services and products their role relates to.[9]

RG 105.81 provides a variety of examples where ASIC may accept RMs under Option 5. For example, where one RM has insufficient experience, but two other RMs have sufficient experience, ASIC may be prepared to accept the collective knowledge and experience of the three RMs for the purpose of granting the AFSL.

Knowledge and skills need to be matched to the AFSL authorisations. For example, a RM for a financial planner should have experience providing personal advice, a RM for a trustee should have experience with custody, and so forth. In essence, you need to ensure the right RM is matched to the specific AFSL.

Fit and proper

When nominating your RMs, they must be a “fit and proper person.” This means that the person:

1. is competent to undertake their role in relation to your financial services business;
2. has the attributes of good character, diligence, honesty, integrity and judgement;
3. is not disqualified by law from performing their role; and
4. either has no conflict of interest in performing their role, or any conflict that exists will not create a material risk that the person will fail to properly perform their role.[10]

Regulatory Guide 2: AFS Licensing Kit: Part 2 – Preparing your AFS licence or variation application provides the factors that may indicate that a person is no longer fit and proper for their role. For example, if the person has had an AFSL suspended or cancelled, or the person has been convicted of an offence in the last 10 years, they may not be fit and proper.[11]

Notably, the fit and proper person test is an ongoing obligation. Therefore, licence holders must ensure they have the appropriate internal measures in place to monitor their RMs compliance with this test.

Changing RMs

AFSL holders have an ongoing obligation to formally notify ASIC within ten business days if they change any RMs. This is completed by submitting a Form FS20. This obligation ensures that the capacity and competence of RMs are being monitored, especially where the AFSL holder’s business develops and consequently, RMs duties and responsibilities evolve.

Further, if you are changing or removing a “key person” from your AFSL, you must notify ASIC within five business days by submitting a Form FS03. Notably, ASIC will impose a “key person condition” on the AFSL if the licensee is heavily dependent on the expertise of one or more RMs. To remove a “key person” also requires an AFSL variation.

Therefore, AFSL holders must ensure they remain on top of these obligations and lodge the relevant forms in the event of any changes. By doing so, ASIC can assess whether the changes affect the businesses organisational competence.

What does this mean for you?

RMs undoubtably play a significant role in the operation of an AFSL. As a result of ASIC’s heightened enforcement action against RMs, it is crucial that an AFSL holder adopts best practice procedures to ensure their RMs are fully compliant with ASIC’s requirements.

You should complete an internal review and implement QA procedures to ensure your RMs maintain the requisite knowledge and skills. If you are applying for an AFSL, your nominated RMs must satisfy the requirements discussed in this article, and you should expect plenty of questions from ASIC.

Finally, to mitigate any ongoing risks, AFSL holders should have a documented contingency plan in place to respond in the event that an RM leaves the organisation or no longer has the qualifications to fulfil their role.

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Authored by:
Georgia Bloxham, Paralegal

[1] Corporations Act 2001 (Cth), s 912A(1)(e).

[2] Regulatory Guide 105: Licensing: Organisation competence, 105.8 (RG 105).

[3] RG 105, 105.12

[4] RG 105, 105.22.

[5] RG 105, 105.38 and 105.36.

[6] RG 105, 105.49.

[7] RG 105, 105.53.

[8] RG 105, 105.41.

[9] RG 105, 105.78.

[10] Regulatory Guide 1: AFS Licensing Kit: Part 1—Applying for and varying an AFS licence, RG 1.18.

[11] Regulatory Guide 2: AFS Licensing Kit: Part 2 – Preparing your AFS licence or variation application, RG 2.224.