AFSL overhaul proposed to boost oversight of advisers, micro-licensees

Micro-licensees would be required to go under more rigorous accreditation and advisers would be more accountable for their conduct under broad recommendations suggested in a green paper issued by the Financial Services Council.

The Value and Future of Advice Licensing green paper, which is backed by research from CoreData, recommends introducing an adviser skills and performance registry, an accreditation framework for third-party compliance service providers and a tiered licensing framework.

Traditionally representing retail super funds and asset managers, the FSC has since grown to include membership from major licensee groups Entireti, WT Financial Group, Count and Rhombus Advisory.

Challenges with advice licensing have long been noted by this group – and were once again a key topic at the recent Professional Planner Licencee Summit – which has consistently argued that licensees aren’t adequately remunerated for the risk they take on and that it’s too easy for advisers to leave and become self-licensed and avoid compliance scrutiny.

The paper noted that while adviser numbers have declined overall, more than 450 new micro AFSLs (defined as firms with fewer than 10 advisers) have been approved since 2020, but compounding this issue is ASIC’s limited capacity to effectively monitor and enforce compliance across all licensees.

“With around 6349 total approved AFSLs of varying size and complexity, the regulator’s resources are stretched thin, creating the potential for high-risk firms to operate without adequate oversight,” the green paper said.

The paper said that while individual practitioners must comply with the Best Interests Duty and Code of Ethics, their AFSL is responsible for supervision, training, and remediation. This in turn distorts the market because AFSLs are held accountable for the conduct of their advisers even in cases where the adviser may be at fault.

“This misalignment of accountability creates undue financial and operational risks for licensees, making it costlier and less attractive to hold an AFSL,” the paper said.

“Conversely, advisers, while subject to individual accountability standards, are not fully empowered to take ownership of their professional responsibilities. This can dilute their sense of personal accountability and weaken the professionalisation of the advice sector.”

Instead, a potential middle ground would involve further reforms to shift liability and responsibility closer to individual practitioners while maintaining necessary consumer protections.

“This could include a greater role for professional associations in accreditation and discipline, alongside targeted regulatory adjustments to ensure AFS licensees are not unduly burdened by adviser misconduct,” the paper said.

The green paper recommended the government could introduce a clear, tiered licensing framework that tailored obligations based on the size, risk profile, and service scope of the entity.

“This could create a level playing field for licensees based on capital invested, complexity of advice being provided, training, oversight, and workplace engagement,” the paper said.

Additionally, the government or industry could establish an accreditation framework for third-party compliance service providers that would require them to meet defined standards of competence, governance, and accountability.

The green paper suggested the introduction of a “practicing certificate model” which advisers would be required to obtain to confirm their compliance with registration, continuing professional development (CPD), and ethical standards.

“By making advisers more accountable for maintaining their professional standing, this could encourage greater ownership of their actions and ensure that advisers are not only fulfilling regulatory requirements but also meeting the ongoing expectations of their profession,” the green paper said.

It suggested ASIC could introduce an adviser skills and performance registry, creating transparency regarding advisers’ professional conduct and performance.

The aim of the registry would be to give clients, licensees and regulators clear access to records of the qualifications and any potential historical issues of advisers, including responsible managers or responsible persons.

“This system could help prevent the phenomenon of ‘phoenixing,’ where individuals with compliance failings leave a licensee and go on to re-establish themselves under a self-licensed or smaller licensed entity,” the green paper said.

The green paper also suggested the government be able to assess the appropriateness of current cash and capital requirements, but that this should take into account the size of the licensee so smaller AFSLs wouldn’t face undue financial burdens.

ASIC would also be required to exercise proactive oversight of the amount of professional indemnity insurance coverage held by AFSLs.

The paper noted that one of the criticisms levelled at the AFSL regime is that it does not resemble other professions, where others like accounting and law are licensed and authorised individually through an association or another body.

“In this model, there is more accountability on the individual practitioner, who are required to hold their own professional indemnity insurance. It is also accompanied by strong self-regulation through professional associations,” the paper said.

Feedback on the green paper will be used to generate a white paper on the Future of Advice Licensing, with an anticipated release date of early 2026.