In March this year the requirements for obtaining and maintain an Australian Financial Services Licence (AFSL) were amended by the Financial Sector Reform (Hayne Royal Commission Response-Stronger Regulators (2019 Measures)) Act 2020.
While the changes appear to have caught many existing and aspiring AFSL holders unaware, they are likely to make applying for or varying an AFSL harder. They also provide ASIC with more situations when it can suspend or cancel an AFSL or ban a person from the industry.
The amendments now require an applicant for an AFSL and any "controller" to meet a fit and proper person test. This changed the good fame and character requirement that had been in place since the commencement of the FSR regime and aligned it to the Australian Credit Licence (ACL) regime's fit and proper requirement.
The reforms introducing a fit and proper person requirement resulted from the Financial System Inquiry Final Report and the ASIC Enforcement Review Taskforce Report which identified gaps in ASIC's licensing regimes and recommended that Government strengthen these regimes so that ASIC can deal more effectively with poor behaviour and misconduct.
How is fit and proper different to good fame and character?
The requirement to be fit and proper allows ASIC to have regard to more factors in determining if a person meets the standard. Previously under the good fame and character standard ASIC could have regard to the following factors:1
- any conviction that the person has had in the last 10 years for offences that involve dishonesty;
- whether the person has had an AFSL that was suspended or cancelled; and
- whether a banning order or disqualification order has previously been made against the person under Ch 7 of the Corporations Act 2001 (Cth).
Under the fit and proper test ASIC can now have regard to:2
- whether the person has been convicted of an offence in the last 10 years;
- whether the person has had an AFSL or ACL that was suspended or cancelled;
- whether a banning order or disqualification order has previously been made against the person under the Corporations Act or the National Consumer Credit Protection Act 2009 (NCCP);
- whether the person has ever been linked to a refusal or failure to give effect to a determination made by AFCA;
- whether the person has ever been a Chapter 5 body corporate or an insolvent under administration;
- whether the person has been disqualified from managing corporations;
- whether the person has been banned from engaging in a credit activity under a State or Territory law; and
- any other relevant information given to ASIC by a State or Territory authority;
- any other matter prescribed by the regulations or that ASIC considers relevant.
While the first three factors are similar under the fit and proper to the good fame and character requirements, they do differ in several key areas. Firstly, the requirement to not have had a banning order or license disqualification has been expanded to include any ACL license suspension or banning under the NCCP. This expands the fit and proper test under the AFSL regime to include a person's actions under the ACL regime. Secondly, the consideration of convictions in the previous 10 years has been expanded from only convictions for offences that involve dishonesty to any conviction in the previous 10 years.
The extra factors that ASIC may have regard to under the fit and proper test over the previous good fame and character test raise the bar for a person with the addition of the requirement to have followed all AFCA determinations, not have been insolvent, banned from managing a corporation or banned from undertaking any credit activity in a State or Territory.
These additional requirements expand the need for a person wanting to apply for an AFSL or who already holds an AFSL to ensure that they have a good record outside of just their criminal convictions and AFSL dealings, opening up consideration of any history in providing credit and managing corporations generally.
Who does the fit and proper test apply to?
Under the legislation the fit and proper test applies to a person seeking to apply for or who already holds an AFSL. The term person can apply to the full range of business structures from a single person to a corporate entity, partnership or trust.3
Where the person is a body corporate that provides the financial services under the licence, the requirement to be fit and proper extends to the officers of the corporate entity. Previously, only responsible officers of a body corporate (i.e. those officers who performed duties in relation to the AFSL) needed to comply with the good fame and character requirement. Now, all officers of a body corporate (whether or not that officer performs duties in relation to the AFSL) must comply with the new fit and proper person test.
In addition, all controllers of an applicant or AFSL holder must meet the fit and proper person requirement. If the corporate entity has a controller, the fit and proper requirements extend to that person. Control of a body corporate, or another entity, for the purposes of the AFS licensing regime, can be determined through a number of ways. These include:
- the ability to cast more than half the votes at a general meeting of the body corporate;
- holding (directly or indirectly) more than half the issued share capital;
- having the capacity to control the composition of the board; and
- having the capacity to determine the outcome of decisions about the body corporate's financial and operating policies.
If the controlling entity is a body corporate, the fit and proper requirements extend to the officers of the controlling entity as well.4
For licensees that are partnerships or trusts, the fit and proper test extends to the partners, trustees and senior managers and if the entity is controlled by a partnership or trust, the test also extends to the partners, trustees and senior managers of that entity.5
This requirement has broadened the scope of who is required to meet the fit and proper requirements over the good fame and character requirements significantly. For entities that have foreign controllers, the ability to show and monitor compliance with the fit and proper requirements can be onerous and extremely difficult if the country of the controller does not maintain insolvency and bankruptcy registers for the officers of the controller. As ASIC can request an entity provide proof of compliance, this could put a licensee in a difficult position to be able to prove the fit and proper test for all officers of their and any controlling entity.
If I already have an AFSL do I need to meet the fit and proper test?
ASIC has the power to suspend or cancel an AFSL after offering a hearing to a licensee and ASIC can suspend or cancel an AFSL if the licensee, officer of a corporate licensee or controller of a licensee does not meet the fit and proper test.6 The effect of this could be that a licensee has their licence suspended or cancelled not only because the licensee or an officer of the licensee fails the fit and proper person requirements but also, potentially, where a controller of a licensee or an officer of the controller of a licensee (when the licensee is a body corporate) fails to meet the fit and proper requirements.
Given the application of the fit and proper person changes to ASIC's licence suspension and cancellation powers, it has the effect of making the fit and proper person requirement an ongoing requirement.
The amendments also expand the situations where ASIC can make a banning order to include when it has reason to believe that a person is not a 'fit and proper person':
- to perform one or more function as an officer of the licensee; or
- to control the licensee.
In addition, an AFSL holder that applies to vary their existing AFSL will be caught by this requirement. Therefore, whether you are applying to add or remove an authorisation or simply applying to replace or remove a Key Person condition, you should be prepared to show that all relevant persons and entities meet the new fit and proper person requirements.
The fit and proper person amendments:
- change the suitability requirement for those involved in AFSLs from good fame and character to the higher standard of fit and proper - expanding the matters ASIC can take into account for licensing decision;
- expand who must meet the new standard to cover all officers and not just those that perform duties in relation to the AFSL;
- expand the people ASIC can assess for suitability in relation to a licence to cover controllers;
- apply not just when applying for or varying a licence but also when ASIC considers whether to suspend or cancel the licence or to ban a person from the industry - thereby making the fit and proper person requirement an ongoing requirement.
Given these changes AFSL holders should:
- update their procedures to ensure that suitability checks are conducted on all officers of a corporate licensee as well as its controllers;
- update their procedures to expand the matters licensees should assess when conducting suitability checks;
- ensure checks as to suitability are conducted periodically;
- if applying for, or varying an AFSL - be prepared to provide information about the suitability of a much broader number of persons and entities associated with the licensee.
1 Draft Financial Regulator Reform (No. 1) Bill 2019: Banning Orders page 6.
2 Section 913BB of the Corporations Act 2001 and Draft Financial Regulator Reform (No. 1) Bill 2019: Banning Orders page 6.
3 Section 913BA of the Corporations Act 2001.
4 Section 913BA(1) of the Corporations Act 2001.
5 Section 913BA(1)(c) and (f) of the Corporations Act 2001.
6 Section 915C(1)(b) of the Corporations Act 2001.
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.