Certain types of alternative finance or tech businesses will need to get an Australian Financial Services Licence (AFSL).  This is because your product or service could be classified as:

  • providing financial product advice to clients;
  • dealing in a financial product;
  • making a market for a financial product;
  • operating a registered scheme;
  • providing a custodial or depository service, or
  • providing traditional trustee company services.

Typical examples of start-ups or fintechs needing an AFSL include robo advisors distributing to the public rather than just providing a platform for licensee use, any kind of investment platform, or a P2P platform raising funds through a Managed Investment Scheme.

If you are not sure whether you need an AFSL, a really good starting point is your accountant or lawyer.  Most will be happy to help with this quick question for no cost.  Your lawyer (probably at some cost or over a lunch or drink) may be able to work through other alternatives, such as whether you could just supply the platform without the service to avoid falling into AFSL territory if you don’t want to go there.

Once you’ve established that you need an AFSL, you need to think about getting your house into order so you can apply for a licence.  This generally involves:

  • working out what documentation you will require, and preparing it (business plans, compliance documents, etc);
  • joining an external dispute resolution scheme (EDR) if applicable;
  • considering your staff – how much time have they spent providing similar products or services, and what type of education have they had?; and
  • getting yourself across what’s involved in applying for an AFSL. 

The ASIC website contains resources about what you need to apply for a licence, education and experience required, and your ongoing obligations as a licensee.  Importantly, organisational competence and licensee obligations don’t stop once you get your licence!

Who do you need to be involved in your business?

All AFSL holders require one or more ‘Responsible Managers’ (RMs). RMs should have direct responsibility for significant day-to-day decisions about your financial services.  There is no rule on how many, or what roles they must play.  You must determine this based on your specific business size, location, activity complexity, and the RM’s individual experience, how busy they are, and whether they have day to day oversight and responsibility.

Your RMs must also:

  • be of good fame and character,
  • have adequate experience performing the activities relevant to your AFSL (usually 3 to 5 years), and
  • have appropriate knowledge relevant to your AFSL.

Having competent RMs is one aspect of ’organisational competence’.  See ASICs Regulatory Guide RG105 for ASIC’s guidance on how to achieve organisational competence.

If you don’t have competent RMs, ASIC will not approve your AFSL application.  

What’s your budget?

If you have VC support, or a chubby piggy bank, you may be able to go directly to a specialised compliance lawyer to help you get your AFSL and prepare your documents and supporting material for you.  Don’t try to cut corners here – go to someone well established in the industry.  Mistakes can bite you later.

If you’re on a budget, and happy to pitch in some elbow grease, you can work with a flexible lawyer and get them to guide you, but you do most of the ground work around drafting all the documentation required.  Prepare yourself by reading up on all of ASIC's online guidance and get a really good idea of what you need to do to apply.  This will save you legal costs, and will put you in a better position to understand your compliance obligations.

If you’re running your start-up on family donations and living on noodles, you’re probably not ready to get an AFSL just yet.

A couple of benefits of using a decent practitioner

  1. Getting it wrong at the start can cost you time, money, and even reputation later.  ASIC media releases are usually not a good form of publicity.
  2. Good practitioners will assist you find a business solution that is compliant with the law, not just churn out a cookie-cutter AFSL application.
  3. If you need to negotiate with ASIC through the AFSL application process, a good practitioner with ASIC experience will know what ASIC expects, and can help make the journey more efficient. 
  4. You may even be able to rely on an exemption to the AFSL regime or class order and not need an AFSL at all.

The application process

The process for applying for an AFSL is more rigorous now than what its previously been.  The actual application involves submitting core documents that include:

  1. People Proofs containing information about the proposed responsible managers and their direct hands-on experience with the proposed financial services and products;
  2. Your Business Description (called an ‘A5’) that sets out your business objectives, your target audience and market, and strategy;
  3. A report containing your Financial Statements and Financial Resources (referred to as a 'B5') setting out that you have the financial resources required to carry on the business that you are proposing. 

These documents articulate to ASIC how your business meets the licensing requirements, and how it proposes to deliver financial products or services in a compliant, fair, honest, and professional way.  To prepare the supporting documents, you must have (at minimum):

  • an understanding of your short and long term strategy,
  • well documented controls and policies, and
  • a clearly documented map of how your proposed responsible managers meet the AFSL authorisations that you want for your business. 

After application lodgement

After lodgement, AFSL applications can take between 4 to 6 months and longer depending on the complexity of the financial services and products that you wish to offer, the qualifications and competency of your responsible managers, and the nature of your customer. 

Generally, retail applications (where you can offer your product or service to a mum or dad consumer) are more onerous than wholesale applications, as retail customers have the potential to suffer more detriment at the hands of your offering.  If you’re keen to get off the ground faster, you may think about starting with a wholesale application, prove yourself, and then apply for a retail AFSL.

During the AFSL application process, you can expect a couple rounds of questions from ASIC (‘requisitions’) while ASIC understands your RM skills and experience, your financial plan, or the merits of your business plan.  Trying to anticipate ASIC’s reception of your AFSL application and spotting any issues that ASIC would want clarified could help refine the content of your application and hopefully shorten the process.

If ASIC is satisfied with your application, it will issue you with a draft AFSL for review.  Consider the draft AFSL carefully - it will be your last opportunity to request any changes before ASIC sends you a final AFSL.

You will need to finalise your compliance policies prior to receiving your AFSL, and will also usually need to put in place another suite of policies as soon as the AFSL is granted.  Some of these include your compliance policies, privacy policies, and AML/CTF program.

Look out for future articles in the series for information about other regulatory obligations, licences, and compliance issues impacting fintechs and startups.