AFS Licensees On Notice – Serious And Repeated Failures Can Lead To Cancellation Of Your AFSL

ASIC has cancelled the Australian Financial Services (AFS) Licence of Pulse Markets Pty Ltd (Pulse Markets) for serious failures in meeting its compliance obligations.

As an overview, ASIC found that Pulse Markets had failed to comply with the following obligations:

• maintaining organisational competence;
• ensuring representatives comply with the financial services laws;
• preparing and lodging financial statements, including obtaining an auditor's report and lodging this with ASIC;
• ensuring adequate human resources to provide the financial services; and
• paying the industry funding levy.

The breaches in this case are quite varied, but at least three relate to the failure to have adequate human resources. There is also the breach of general duty under section 912A(1)(d) to have adequate resources - ASIC found Pulse Markets failed to have adequate human resources to provide the services covered by its AFS Licence. The breaches in relation to monitoring authorised representatives, ensuring representatives comply with the financial services law, and in relation to maintaining organisational competence, also come back to the overarching obligation to have adequate resources.

Failure to maintain organisational competence

All AFS licensees have the obligation to maintain organisational competence under section 912A(1)(e) of the Corporations Act.

ASIC's Regulatory Guide 105 states that to comply with this obligation, AFS Licensees must, at a minimum, nominate Responsible Managers who:

• are directly responsible for significant day-to-day decisions about the financial services business;
• have the appropriate knowledge and skills which cover the financial products and services provided by the AFS Licensee; and
• meet one of the five options outlined in Regulatory Guide 105 for proving competence (further information here).

Meeting the organisational competence obligation is not a set and forget task. All AFS Licensees will have nominated Responsible Manager(s) as part of their initial AFS Licence application, but this is not where the obligation ends. AFS Licensees must ensure that at all times the organisational competence obligation is being met. This means, that a re-assessment of whether the organisational competence obligation is met should be undertaken by AFS Licensees on a regular basis, but also where:

• there is a change to the financial products and/or services being offered;
• a RM leaves the business; or
• the clients to whom the financial products and/or services are provided change.

The obligation to have sufficient resources

A review of whether an AFS Licensee has sufficient human resources should occur regularly, and take into account:

• the number and nature of the AFS Licensee's clients;
• the complexity of the financial products being offered;
• the number of corporate authorised representatives and whether these entities are related to the AFS Licensee;
• the number of sub-authorised representatives of any corporate authorised representatives who need to be supervised and monitored;
• the method of delivering financial products and/or services;
• the jurisdictions dealt with, including any offshore external service providers and whether the AFS Licensee has human resources appropriate for these jurisdictions (e.g.: in terms of language and time zones); or
• any external service providers who have been engaged to assist the AFS Licensee's own staff.

Triggers for a review of an AFS Licensee's human resources may include a change to any of the items listed above, or:

• a change to the Responsible Managers or officeholders of the AFS Licensee;
• a variation of the AFS Licence;
• an increase in the number of client complaints regarding the AFS Licensee's staff or its response times; or
• the identification of systemic issues or breaches.

Sophie Grace can assist AFS Licensee's to document their procedures with respect to Responsible Managers and adequacy of resources. If you need further assistance with these obligations, please contact us.

Further Reading

• ASIC Media Release
• Regulatory Guide 105
• Responsible Managers
• Responsible Manager Policy
• Adequacy of Resources Polic

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.