Australia: Amendments to AFSL holder requirements under the Corporations Act

Last Updated: 5 April 2017
Article by Melanie Williamson

IN BRIEF - CREATING UNIFORM PROFESSIONAL STANDARDS WILL BOOST RETAIL CLIENTS' CONFIDENCE

Amendments to the educational, training and ethical standards for holders of Australian Financial Services Licences (AFSL) under the Corporations Act 2001 (Cth) (the Act) will commence on 1 January 2019 and will affect AFSL holders who provide personal advice to retail clients.

GOVERNMENT AIMS TO RAISE FINANCIAL ADVISERS' PROFESSIONAL STANDARDS

On 9 February 2017, the Senate passed the Corporations Amendment (Professional Standards of Financial Advisers) Bill 2016. These amendments are a substantial change from the current regulatory environment for AFSL holders in response to serious concerns regarding the professional standards of financial advisers.

Under the amendments, the Commonwealth government is establishing an independent standards body to administer the regime which will place heavy ethical, educational and training requirements on holders of AFSLs and their authorised representatives if providing personal advice to retail clients.

AMENDMENTS APPLY TO AFSL HOLDERS PROVIDING PERSONAL ADVICE TO RETAIL CLIENTS

These changes will apply to a holder of an AFSL who provides personal advice to retail clients. Personal advice is advice that takes into account your personal situation.

Under the Act, a retail client is a client that is not a wholesale client. There are various categories of wholesale client under the Act, the most common include:

  • the client is investing in or being advised on a product that exceeds $500,000 in value
  • the client has net assets of at least $2.5 million or gross income for last two financial years of $250,000, as certified by an accountant
  • the client is a professional investor
  • the client is a large business (more than 20 employees, or less than 100 if business involves the manufacture of goods), or
  • the client is a sophisticated investor

The new regime has been introduced to protect those retail investor clients that are not perceived as financially savvy, informed or confident enough to protect their interests.

FINANCIAL ADVISERS MUST MEET FOUR TRAINING AND EDUCATIONAL STANDARDS

Currently, there are no minimum educational or training standards or ongoing professional development for financial advisers.

The amendments to the Corporations Act will significantly alter this landscape by establishing four new education and training standards to be met by financial advisers:

  1. the person has completed a bachelor or higher degree, or equivalent qualification, approved by the standards body or the person has completed a foreign qualification approved by the standards body (Qualification Standard)
  2. the person has passed an exam approved by the standards body (Exam Standard)
  3. the person has undertaken at least one year of work and training that meets the requirements set by the standards body (Training Standard), and
  4. the person meets the continuous professional development (CPD) requirements set by the standards body (CPD Standard)

ASIC will not grant an AFSL to an individual who has not met the Qualification Standard, Exam Standard and Training Standard. An authorised representative or sub-representative of a financial service licensee must meet the Qualification Standard and the Exam Standard and must be undertaking the Training Standard (if not already met) to be appointed.

All providers of personal advice must comply with the CPD Standard in a CPD year.

STANDARDS BODY WILL MONITOR COMPLIANCE AGAINST A CODE OF ETHICS

There is currently no requirement for a financial adviser to be a member of an industry body and even then each body has its own code of conduct. Under the new regime, the standards body will develop and monitor compliance across the industry against a uniform code of ethics.

AMENDMENTS WILL IMPROVE INVESTOR CONFIDENCE, BUT MAY INCREASE COST AND TIME OF FINANCIAL ADVICE

The new regime will create a uniform professional standard for industry participants which will increase retail clients' confidence in the quality of advice being paid for and received. We consider that this will have a significant influence on investor confidence not only in an individual financial adviser but the Australian financial markets as a whole.

Unfortunately, this higher standard may result in significant exit from the industry by those advisers who are unwilling or unable to comply with the new requirements, potentially increasing the cost and timeliness of receiving financial advice.

WHEN DO THE AFSL AMENDMENTS APPLY?

From 1 January 2019, new advisers entering the industry will be required to comply with the requirements. Existing advisers will have until 1 January 2021 to pass the exam and until 1 January 2024 to meet the educational requirements.

Jon Meadmore
Corporate advisory
Colin Biggers & Paisley

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.

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Authors
Melanie Williamson
 
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