The new accountant's "limited AFSL", how it works, and what will change from 2016

This is the final part of a 4 part series in which we explore the thin (sometimes, very thin) line that accountants can inadvertently cross when giving advice to their clients. The "line" is of course the need to hold an Australian Financial Services License (AFSL) to cover the provision of that advice.

For the purposes of this series, we're assuming that the client is a retail client under the Corporations Act 2001 (Cth) (Corporations Act).

In part 1, we discussed the "accountant's exemption", which has the effect of permitting a "recognised accountant" to recommend that someone establishes their own SMSF or dispose of their existing superannuation interest (perhaps to transfer the benefits to an SMSF), where that advice is given in the course of providing advice on the "establishment, operation, structuring or valuation" of the SMSF.

We also flagged, however, the forthcoming removal of the “accountant’s exemption”, and the new licensing regime that will apply for accountants from 1 July 2016.

This Part 4 will discuss the new licensing regime from 1 July 2016, and the "transitional" arrangements which apply for the period 1 July 2013 to 30 June 2016.

Why remove the "accountant's exemption"?

The removal of the "accountant's exemption" is essentially a product of the "Future of Financial Advice" (FOFA) reforms, which largely took effect from 1 July 2013.

In a nutshell, FOFA prescribes a statutory "best interests" duty on AFS licensees and their representatives, and bans a number of payment arrangements involving licensees and their representatives.

As we discussed in earlier articles in this series, accountants are able to provide advice on SMSFs under the "accountant's exemption", courtesy of Regulation 7.1.29A of the Corporations Regulations.

By way of background, let's recall how the "accountant's exemption" operates:

Section 766A(2)(b) of the Corporations Act provides that the Corporations Regulations may set out the circumstances in which a person is taken not to provide a financial service. This takes us to Reg 7.1.29 of the Corporations Regulations, which states that a person who provides an eligible service in the context of conducting an exempt service is taken not to provide a financial service.

“Eligible service” is defined by reference to the definition of financial service in s766A(1) of the Corporations Act. It therefore includes (as is relevant for accountants) providing financial product advice in relation to SMSFs.

“Exempt service” includes (as relevant to accountants giving advice in relation to SMSFs) the following (Reg 7.1.29(5)(a) and (b) of the Corporations Regulations):

“…advice in relation to the establishment, operation, structuring or valuation of a superannuation fund…[where] the person advised is, or is likely to become…a trustee…or director of a trustee…or a person who controls the management…of the superannuation fund.”

However, Reg 7.1.29(5)(c)(ii) of the Corporations Regulations requires that the advice does notinclude a recommendation that a person acquire or dispose of a superannuation product.

So, if we were to stop there, we’d see that a person cannot – without an AFSL – recommend that someone establishes their own SMSF or dispose of their existing superannuation interest (perhaps to transfer the benefits to an SMSF), even if that advice is given in the course of providing advice on the "establishment, operation, structuring or valuation" of the SMSF. The establishment of an SMSF would be considered the acquisition of a financial product.

However, Reg 7.1.29A of the Corporations Regulations provides that Reg 7.1.29(5)(c)(ii) (which is the regulation which provides that advice cannot include a recommendation that a person acquire or dispose of a superannuation product), does not apply if the advice/recommendation is given by a recognised accountant in relation to an SMSF. This is the "accountant's exemption".

Once this Regulation is removed on and from 1 July 2016, however, accountants will generally be unable to advise a person to acquire or dispose of an interest in an SMSF without being licensed in their own right, or an authorised representative of a licensee.

What is the "limited AFSL"?

The "limited" AFSL is essentially a transitional measure, which permits accountants to apply for an AFSL, but with reduced application and compliance requirements. It therefore affords the opportunity to obtain an AFSL but under a less stringent application process and with reduced license conditions which would otherwise apply to "full" licensees.

From 1 July 2016, accountants who propose to give advice in relation to the establishment or disposal of an SMSF will need to hold either a "full" or "limited" AFSL, or be the representative of a licensee.

It should be noted, however, that the "limited" AFSL, whilst having less stringent application and compliance requirements, does also limit the types of "financial services" which are able to be provided under the license. Specifically, financial services under a "limited" AFSL are limited to the following:

  • providing advice on SMSFs;
  • providing advice on superannuation products in relation to a client’s existing holding in a super product but only to the extent required for making a recommendation that the person establish an SMSF or advice on contributions or pensions under a super product;
  • providing ‘class of product’ advice on a range of financial products; and
  • arranging for a person to deal in an interest in an SMSF.

There are other significant differences between a "full" and "limited" AFSL as well.

Here’s a table outlining some key differences between the "limited AFSL" and the "full" AFSL.

Click here to view image.

Conclusion

With the forthcoming removal of the "accountant's exemption", an opportunity exists for accountants to consider the transitional measures currently available, and obtain a "limited" AFSL.

It should be noted, of course, that whilst the "limited" AFSL has less stringent application and compliance requirements, it does limit the types of "financial services" which are able to be provided under the license.