Australia: The application of the ASIC industry funding model in the financial advice sector

The ASIC Industry Funding Model commenced on 1 July 2017, marking the introduction of a "user-pays" system for ASIC's supervision of the corporate, financial services markets and consumer credit sector.

The model will work on a cost recovery basis, so that the amount paid by participants in a particular sector or sub-sector in a financial year will add up to the amount of ASIC's relevant regulatory costs for that sector or sub-sector for the same period.

The detailed mechanics of the levy are set out in the ASIC Supervisory Cost Recovery Levy Regulations 2017 ("Regulations").

Under the new arrangements, entities regulated by ASIC will become "leviable entities" and will be required to pay a levy for each financial year. The amount paid by each leviable entity will vary depending on its categorisation under a list of sectors and sub-sectors set out in the Regulations. This approach is used because of the range of industry sub-sectors regulated by ASIC, variations in ASIC's regulatory costs for each industry sub-sector, and the differences in size and levels of activity undertaken by each entity in each industry subsector.

The Regulations prescribe "basic" levies in some sub-sectors, meaning that as a default position, ASIC's regulatory costs will be shared equally among the entities in the sub-sector. This approach has been used where the regulatory costs are approximately the same for each entity, and the administrative and regulatory burden associated with calculating more tailored levies outweighs the benefits of doing so. Additional "graduated" levy components have been prescribed for sub-sectors where ASIC's costs vary significantly across the regulated population.

Leviable entities will need to rely on information provided by ASIC each financial year (about its costs of regulation and the number of entities in the relevant sub-sector) in order to know the amount they ultimately need to pay.

The "leviable entities" in the financial advice sector are licensees rather than authorised representatives. The levy payable will vary according to the particular licensee's authorisations. There are 4 sub-sectors in the financial advice sector. AFS licensees authorised to provide personal advice on "relevant financial products" to retail clients will pay the most. This includes:

  • a minimum levy component of $1,500; and
  • a graduated levy component based on ASIC's relevant regulatory costs each financial year, together with the number of advisers who are providing services under the licence, as recorded on ASIC's Financial Advisers Register.

The term "relevant financial products" means financial products other than basic banking products, general insurance products, consumer credit insurance; or a combination of any of those products.

AFS licensees who are authorised to provide advice to retail clients, other than in relation to relevant products, will pay a basic levy. This will also apply to those AFS licensees who are authorised to provide personal advice only to wholesale clients, and those authorised to provide general advice only.

As levy amounts in the financial advice sector will be calculated by reference to a licensee's authorisations, some licensees may be tempted to remove authorisations they have but don't currently rely on to conduct their business. However, bear in mind that new education and training requirements have raised the standards required to obtain new authorisations to provide personal advice to retail clients. As such, any decision to give up an existing authorisation should not be made lightly.

ASIC recently released its Report 535: ASIC cost recovery arrangements: 2017-18, which provides a summary of the calculation metrics applicable to each sub-sector, and their respective minimum levy amounts.

In addition to the new levies, ASIC will impose a fee-for-service on certain activities, based on ASIC?s average cost in providing the specific service to individual entities. A fee for service will be charged for activities such as licence and registration applications, cancellations, deregistrations, variations, document reviews and applications for relief.

You may be wondering . . .

What about entities that conduct more than one type of business?

If a business provides more than one regulated activity, this will be reflected in the levies charged. For example, if an entity is authorised as a deposit product provider and a payment product provider, the entity will pay both applicable levies in order to ensure ASIC recovers all its costs of supervising the entity. The Regulations set out criteria for determining which sub-sector/s a leviable entity is part of.

When will my business need to pay?

The first invoices under the model will be issued in January 2019, and will cover the 2017-18 financial year.

Is the levy tax deductible?

Some other cost recovery levies are tax deductible (for example, the Financial Institutions Supervisory Levies). However, the Government is currently considering the most appropriate tax treatment of the industry funding levies.

The Bigger Picture

The Federal Government has given five main reasons for this change in ASIC's funding model:

  1. to ensure that ASIC is well resourced;
  2. to bring ASIC's funding model in line with comparable institutions;
  3. to ensure that those who cause the regulatory burden are the ones who pay for it – not taxpayers as a whole;
  4. to enhance ASIC's regulatory transparency (the new model comes with certain reporting requirements that mean ASIC has to explain how funds are spent); and
  5. to give ASIC a richer data set, which will improve its regulatory oversight.

On the second point listed, these changes will more closely align ASIC's funding model with APRA's, as well as a number of international financial sector regulators, including the Financial Conduct Authority in the United Kingdom and the Securities and Exchange Commission in the United States.

In addition to these changes, the Government has also taken the following steps to improve the resources available to ASIC, including:

  • $127.2 million in funding to boost ASIC's data analytics, surveillance and enforcement capabilities as well as accelerate the implementation of a number of consumer protection measures recommended as part of the Financial System Inquiry;
  • a comprehensive review of ASIC's enforcement regime to ensure the regulator has the powers and penalties available to it to deter misconduct and foster consumer confidence; and
  • the ASIC Capability Review, undertaken to ensure that ASIC is operating in line with global best practice.

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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