ASIC cancelled the Australian financial services license of Starfish Financial Services last week, citing “organisational incompetence” as one of the reasons. I know a thing or two about organisational incompetence – I’ve been practicing it for a fair part of my career.

Often ASIC’s announcements on bannings, suspensions and fines are a bit ho-hum. They’re absolutely necessary – it’s the regulator informing the market as it goes about its business – but there’s often not a lot that can be learned by other advice firms and advisers when the watchdog bites someone who has, for example, committed fraud against his or her clients. “Don’t commit fraud, kids” is hardly a revelatory warning.

But this one is different.

While Starfish has the usual right to appeal ASIC’s decision to the Administrative Appeals Tribunal, the regulator said the licensee had “failed to maintain the required organisational competence to provide the financial services covered by its AFSL and to meet its financial reporting obligations”.

This should be a reminder to all own-AFSL or would-be own-AFSL firms that there’s a lot more to becoming self-licensed than just getting through the licence application. In addition to attending to the day-to-day job of being an actual adviser (a big enough task on its own), there’s the ongoing issue of being properly resourced – and competent, obviously – to run an advice business and to act as a Responsible Manager on an AFSL.

“Organisational competence” only hints at the range and depth of skills required to do all three things at once, but it’s often an issue overlooked among the issues considered by advisers as they consider obtaining their own AFSL.

There’s a thriving industry in providing to own-AFSL firms the services that they would previously have received from a licensee, but the one thing that absolutely cannot be outsourced is the responsibility of being an RM. The buck stops there, not with the provider of support services.

The RM is the individual appointed by a licensee who must demonstrate to the regulator that they have the knowledge, skills and experience to provide the services it’s authorised to provide under the terms of its licence.

ASIC Regulatory Guide RG105 – AFS licensing: Organisational competence says that if you are an AFSL, you must “maintain the competence to provide the financial services covered by your AFS licence: see s912A(1)(e) of the Corporations Act”.

“We refer to this obligation as the ‘organisational competence obligation’,” it says.

“This is because this obligation requires you to be competent at the organisational level. We assess your compliance with this obligation by looking at the knowledge and skills of the people who manage your financial services business. We refer to these people as your ‘Responsible Managers’.”

There are five general options that an RM can choose from to demonstrate knowledge and skill. An RM need only satisfy one of the options.

The five options for demonstrating knowledge and skills of responsible managers:

Option 1

Knowledge (i.e. qualifications, training): Meet widely adopted and relevant industry standard or relevant standard set by APRA.

Skill (i.e. experience): Three years relevant experience over the past five years.

Option 2

Knowledge (i.e. qualifications, training): Be individually assessed by an authorised assessor as having relevant knowledge equivalent to a diploma.

Skill (i.e. experience): Five years relevant experience over the past eight years.

Option 3

Knowledge (i.e. qualifications, training): Hold a university degree in a relevant discipline and complete a relevant short industry course.

Skill (i.e. experience): Three years relevant experience over the past five years.

Option 4

Knowledge (i.e. qualifications, training): Hold a relevant industry-specific or product-specific qualification equivalent to a diploma (or higher).

Skill (i.e. experience): Three years relevant experience over the past five years.

Option 5

If not relying on Options 1 to 4, you need to provide a written submission that satisfies us that your responsible manager has appropriate knowledge and skills for their role. Your submission must cover all of the information in RG 105.78.

Source: ASIC Regulatory Guide RG105 – AFS licensing: Organisational competence. Note: Some example situations where ASIC may, or may not, accept a responsible manager under Option 5 are outlined at RG 105.81.

Anecdotally, there are still plenty of advice firms applying or considering applying for their own AFSLs. And there are plenty of good reasons for wanting to do that. But doing it half-heartedly, cutting corners or – worst of all – doing it to evade the scrutiny that advisers in big licensee groups have been subject to (a topic for another day) is not advisable.

As ASIC has demonstrated, if it finds an AFSL who’s not up to the task it will take action. And when ASIC comes after an own-AFSL firm, there’s no big parent there to stand between the firm and the watchdog, and no one to help shoulder the burden of an investigation and business interruption.

2 comments on “Are you competent enough to run your own licence? Asking for a friend”
    Avatar

    Great points Simon. We discuss competence with RMs and licensees nearly every day. Maintaining competence goes beyond a training schedule, and includes maintaining operational oversight, and driving the right culture.

    Avatar
    Alex Euvrard

    Hi Simon. Very good article. I would say that the ‘Advisers’ we work with to establish their own AFSL’s are arguably more competent to fill the role of ‘Responsible Manager’ than the licenses they have come from. They have direct control, oversight and are not scared by that added responsibility. The days of Advisers setting up AFSL’s to avoid a regulator or that a larger licensee acts as a buffer simply do not exist anymore. It is about taking control and plugging into the appropriate services/resources to do that

Join the discussion