ASIC policy on licences
11 March 2002 marked the start of the ambitious reform of the regulation of Australia's financial services sector, with the bulk of the changes introduced by the Financial Services Reform Act 2001 (the FSR Act) coming into effect from that date.
- Financial resource requirements for AFS licence holders
- AFS licensing kit
- AFS licence conditions
- Policy statement on Australian market licences
- Other ASIC guidance
Last updated April 2003.
Since the passage of the FSR Act, numerous regulations, policy statements, class orders and practice notes have been issued to provide flesh to the "skeleton of principle" set out in the FSR Act.
In this article, we report on the ASIC policy releases relating to the requirements that need to be met to hold an Australian financial services (AFS) licence and an Australian market licence.
Financial resource requirements for AFS licence holders
After a round of consultations, ASIC released in December 2001 the initial version of 'PS 166 Licensing: Financial requirements', which sets out the financial requirements that must be met by holders of an AFS licence. (An updated version of PS 166 was released in November 2002.) Under PS 166, AFS holders must monitor compliance with the financial conditions of their AFS licence on a continuous basis. If the holder becomes aware that the conditions have been breached, they must provide ASIC with a written report.
The policy statement also sets out the different financial requirements that must be met by participants, which are determined by the type of services offered by the participants. The services covered are:
- managed investments and custody services;
- licensees holding client money or property;
- licensees with financial obligations from transacting with clients as principals;
- foreign exchange dealers; and
- general market participants.
A general summary of the financial requirements is set out below. (The policy statement provides details of how these requirements are to be met.)
All AFS licence holders are expected to meet the base level financial requirements. These are:
- being solvent at all times (the test is being able to pay all debts as and when they become due and payable);
- having total assets in excess of total liabilities based on the most recent annual balance sheet lodged with ASIC;
- meeting the cash needs requirements by complying at all times with either Option 1 (reasonable estimate projection plus cash contingency) or Option 2 (contingency-based projection) as set out in the policy statement; and
- meeting the audit requirements including lodging an annual audit report with ASIC with an opinion by a registered company auditor.
Specific financial requirements that must be met by licence holders are as follows.
| Services offered | Financial requirements |
|---|---|
| Managed investments and custody | These requirements apply to responsible entities (RE), operators of investor directed portfolio services (IDPS) and providers of custodial or depository services.
|
| Licensees holding client money or property | Licensees must hold at least $50,000 in surplus liquid funds where the value of the property or money held is more than $100,000. |
| Licensees who transact with clients as principals | Licensees must hold adjusted surplus liquid funds of at least $50,000 plus additional amounts of:
The maximum amount of adjusted surplus liquid funds is $100 million. |
| Foreign exchange dealers | Licensees transacting as principals must hold $10 million in tier one capital (as defined in APRA's Prudential Standards and Guidance Notes for authorised deposit–taking institutions (October 2001)) as if the licensee were an authorised deposit-taking institution. |
| General market participants | Other than the base level financial requirements (see above), licensees are expected to meet the requirements of their market's operating rules in relation to financial requirements. According to ASIC, the financial requirements of ASX (including licensees who are participants in the market conducted by the ASX Futures Exchange Pty Ltd) and the Sydney Futures Exchange Corporation Limited meet ASIC's requirements. |
AFS licensing kit
In preparation for the commencement of the FSR Act, the Australian Financial Services Licensing Kit (the Kit) and an Addendum to the Kit were released by ASIC on 1 February 2002. Since then, ASIC has issued further updates and the most recent version of the Kit was released on 29 April 2003. The Kit sets out the information ASIC requires from an applicant for an AFS licence.
AFS Licence conditions
ASIC has released 'PF 209 Australian Financial Services Licence conditions (initially issued on 8 March 2002 and updated on 11 June 2002 and again on 26 March 2003) which sets out the standard licence conditions governing AFS licence holders. Where an AFS licence holder has been granted an AFS licence prior to 26 March 2003 and the licensee wants to take advantage of the changes to the licence conditions introduced under the updated version of PF 209, the licensee must apply to ASIC for a variation of its licence. The conditions prescribed in r 7.6.04 of the Corporations Regulations will also apply.
Policy statement on Australian market licences
Do you require an Australian market licence? Are you operating a financial market in Australia? The answers to these questions and many more including how to obtain an Australian market licence can be found in PS 172 Australian market licences: Australian operators, which was issued by ASIC on 6 March 2002.
A person will require an Australian market licence if they operate a financial market in Australia that is not exempt from the operation of Part 7.2 of the Corporations Act 2001 (the Act). PS 172 sets out the various tests for determining whether:
- a financial market is located in Australia (there is a trading floor in Australia or a significant part of the market infrastructure is located in Australia);
- the financial market is targeted at Australian investors. A financial market will be considered to be targeted at Australian investors in one of the following situations:
- participants in Australia have direct secure access to the market platform through a market screen;
- market prices are denominated in Australian dollars;
- there is promotion of the market in Australia; or
- the market is regularly used by Australian investors;
- a financial market should be exempt from the operation of Part 7.2 of the Act; and
- a person is operating a financial market.
Other ASIC guidance
Since the passing of the FSR Act, ASIC has issued several publications (which it continues to review and update as necessary to reflect changes in legislation and policy) on licensing under the FSR regime. In addition to those mentioned above, it has published guidelines on a number of other licensing–related issues. These include:
- Answering the questions in your AFS licence application
- Educational qualifications and industry qualifications approved by ASIC
- Licensing: The scope of the licensing regime: Financial product advice and dealing
- Licensing and disclosure: Making the transition to the FSR regime
- Making the transition to an AFS licence: Pre–FSR licences and insurance broker registrations
- Various guidance papers for participants completing their AFS applications in specific areas (eg, financial advisers and market makers).
For further details, refer to ASIC's website.
