Participating in carbon markets: Applying for an AFS licence
Obtaining your own Australian financial services (AFS) licence or varying an existing AFS licence can be a complex process. In this article, we will discuss some of the key questions that need to be considered before applying for an AFS licence to operate a carbon business.
Do I need an AFS licence?
Holding your own AFS licence is an important step for any financial services business. It can provide you with independence, allow you to reach larger markets and provide your clients with a greater sense of security. But the question is, do you need one?
Chances are that if you are ready this guide, then you have already made the decision to obtain an AFS licence to participate in carbon markets. If you are in the business of providing financial services, specifically relating to Australian carbon credit units (ACCUs) and safeguard mechanism credit units (SMUs), then unless an exemption applies, you will need an AFS licence.
There are, however, a number of circumstances where you are not required to hold an AFS licence. Examples include where you are an authorised representative of a AFS licensee, you only provide the financial services to related bodies corporate or you are an offshore regulated entity that only provides financial services to wholesale clients in Australia.
If you are not sure whether you need an AFS licence, then it is best to speak to a financial services specialist and get some advice on the matter.
What authorisations do I need?
Every AFS licence is different and not every AFS licence is authorised to offer every type of financial service available. Some AFS licensees may only require a limited AFS licence while other AFS licensees like wholesale trustees may require an AFS licence with various authorisations.
Determining the precise authorisations you require to operate your proposed carbon business will determine the responsible managers you need to nominate. This step is crucial in the process as this outlines the exact financial services you will be able to provide once you receive your AFS licence.
Will you be providing general or personal financial product advice? Do you intend on needing an AFS licence to issue certain financial products or arranging for another person to acquire certain financial products as part of your carbon business? There are slight differences in authorisations that you can apply for and ultimately obtaining the wrong authorisations could result in you providing financial services without a licence, even if you hold one.
Do I have the right people with the necessary qualifications and experience?
Any AFS licence application relies on the qualifications and experience of the nominated responsible managers.
A responsible manager is a person who is responsible for the day-to-day decision making about the financial services provided by an AFS licensee. This does not mean they actually have to provide the financial services, however, they must be responsible for the supervision of those who do provide the financial services.
A responsible manager is not necessarily a company officer and vice versa. There is no requirement to be a company director or officer to be appointed as a responsible manager.
The rule of thumb is you will need to appoint at least two responsible managers, but this is heavily dependent on the kind of carbon business you intend to operate.
The responsible managers nominated by you will need to meet one of five options specified by ASIC. This means that the responsible managers need to hold an undergraduate or postgraduate qualification relevant to the financial services required to operate your carbon business, along with three years’ experience out of the last five in providing the financial services for which they are nominated. To operate a carbon business, one responsible manager’s experience would need to be in ACCUs and/or SMUs, likely for both advice and dealing services (applying for).
A special submission can be made for people who do not hold formal qualifications in carbon markets, but who nevertheless are highly experienced.
What are the financial requirements?
All AFS licensees (expect for those regulated by APRA) must be solvent and have positive net assets. Along with this, AFS licensees must prove that they have, or have access to sufficient financial resources to meet their anticipated cash flow expenses.
For particular AFS licensees who operate a carbon business that is a wholesale fund trustee, additional capital adequacy requirements apply.
If you intend to operate a carbon business that is a wholesale fund trustee, you will need to budget for the requirements and provide balance sheets, cash flow statements and other financial information to ASIC as part of the AFS licence application process.
Do I need a retail or wholesale licence?
A fundamental question to confirm before you make an AFS licence application is whether you wish to provide financial services to retail clients or wholesale clients or both.
Providing financial services to retail clients means that you are required to hold professional indemnity (PI) insurance, become a member of an external dispute resolution scheme and comply with additional training obligations where you are providing advice to those retail clients.
It is vitally important to understand how retail clients and wholesale clients are defined under the law to understand the kind of AFS licence you require. Generally, wholesale clients are those who meet certain wealth thresholds or invest at least $500,000 in a financial product.
What are the steps involved in the process?
Step 1 – Preparing the application
The first step in this process is to collate all the material needed to lodge with ASIC. This requires the preparation of core proofs, financial statements and cash flows. It also means collating material from the nominated responsible managers such as copies of their qualifications, along with police checks and bankruptcy searches.
This application, form FS01, is lodged online with ASIC and we will complete and lodge this application on your behalf. Along with this, the proofs prepared for the application are also lodged online with the form FS01.
Step 2 – ASIC review and preparing any additional proofs
Once the application has been lodged, it will be delegated to an ASIC assessor. The first review that is conducted is whether the application is accepted at all. This generally means that the application contains the fundamental components that ASIC requires. However, an assessment of the substance of the application is not made at this stage.
If the application is accepted at this first stage, then a review is conducted by ASIC and ASIC may seek further information including in the form of additional proofs.
Step 3 – ASIC requisitions
ASIC may ask for further information arising from its review of the proofs which have been lodged.
An AFS licence applicant generally has 10 days to respond to such requisitions.
Step 4 – Letter of offer
If the requisitions are answered to ASIC’s satisfaction and it decided to grant an AFS licence, then it will issue a letter of offer with draft licence conditions.
You may be required to provide proof of certain things at this stage, such a PI insurance cover if you are providing financial services to retail clients.
How long will it take?
You should allow for the AFS application process to take between three to six months.
If you do not have the requisite qualifications and/or experience within your organisation to obtain the kind of AFS licence you need to operate your carbon business, then you will need to look outside your organisation for the right personnel. This process can add a significant amount of time to the overall application time, especially because personnel with experience in carbon markets can be difficult to come by.
How we can help
CNM Legal will guide you through the application process from start to finish, including:
- Providing a legal opinion on what authorisations you will need to operate your proposed carbon business.
- Assessing the responsible managers you wish to nominate and advice you on whether their qualifications and experience are sufficient to meet ASIC’s requirements. We maintain a register of available responsible managers with specific skills so if it is required and we have a suitable responsible manager with the necessary qualifications and experience for your proposed carbon business, we can make introductions.
- Helping you understand the financial requirements that will apply to your AFS licence for your proposed carbon business.
- Preparing the necessary proof documents for lodgement with ASIC. These documents are the supporting information for the AFS licence application and are tailored to your proposed carbon business.
- Advising you with a high degree of certainty as to whether your AFS licence application will be accepted and identify any potential weaknesses in the application.
- Assisting you in dealing with any requisitions from ASIC.
For more information, email cmee@cnmlegal.com.au or jbauers@cnmlegal.com.au, or call 07 3211 4010
This paper is produced as general information in summary for clients and should not be relied upon as a substitute for detailed legal advice or as a basis for formulating business or other decisions. CNM Legal asserts copyright over the contents of this document.