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Regulation: deadline looming for Australian Financial Services Licence holders

Regulation

Monday 28 June 2010

ASIC reminds AFSL holders that from 1 July 2010, all AFSL holders who wish to provide financial services in respect of margin lending products will need to have either margin lending authorisations or have lodged an application to vary their AFSLs to include margin lending authorisations.

ASIC notice 28 June 2010.

Margin lending—getting or varying an AFS licence

This information sheet is for issuers and advisers of margin lending facilities, who intend to apply for either a new Australian financial services (AFS) licence or a variation to an existing AFS licence. It explains:

  • what are the new requirements for margin lending facilities
  • when you must apply for an AFS licence or variation
  • how to apply for an AFS licence or variation
  • how will ASIC assess applications for margin lending facilities.

What are the new requirements for margin lending facilities?

Issuers and advisers of margin lending facilities must comply with new licensing, conduct and disclosure requirements set down in the Corporations Legislation Amendment (Financial Modernisation) Act 2009 (the Modernisation Act).
The Modernisation Act, among other things, makes margin lending facilities a financial product and requires that issuers and advisers of margin lending facilities hold an AFS licence authorising them to provide these facilities.
The same licensing, conduct and disclosure requirements that currently apply to financial services will apply to providers and financial advisers in relation to margin lending facilities. Margin lending facilities will be regulated in the same way as other financial products.
The Modernisation Act also imposes new responsible lending requirements on issuers of margin lending facilities and clarifies responsibility for providing notification of margin calls.

When must you apply for an AFS licence or variation?

By 30 June 2010, issuers and advisers of margin lending facilities must have applied for an AFS licence with an authorisation to provide margin lending facilities, or a variation to an existing AFS licence to include an authorisation to provide margin lending facilities
.
After 30 June 2010, if you have not already lodged with ASIC an application for an AFS licence or a variation to an existing AFS licence, you must not issue or advise on margin lending facilities. You can only issue or advise on margin lending facilities after you have been granted an AFS licence or a variation to your existing licence.
It is important that you consider your situation and make any necessary arrangements to ensure you can continue carrying on business after 30 June 2010.
Table 1: Timeline for licensing of margin lending facilities

From 1 February 2010

Existing issuers and advisers of margin lending facilities can apply for an AFS licence, or a variation to an existing AFS licence.

By 30 June 2010

Issuers and advisers of margin lending facilities must have applied for an AFS licence, or a variation to an existing AFS licence.

After 30 June 2010

If issuers and advisers have not already lodged an application with ASIC for an AFS licence or a variation to an existing AFS licence, they must not issue or advise on margin lending facilities until they have been granted an AFS licence, or a variation to an existing AFS licence.

From 1 January 2011

Issuers and advisers will be subject to new conduct and disclosure requirements. These changes were introduced by the Modernisation Act.

How to apply for an AFS licence or variation

Before you apply for an AFS licence or variation to an existing AFS licence, make sure you have read ASIC’s guidance and prepared the documents you will need for your application.

Step 1: Read ASIC’s guidance

Our updated regulatory guides, pro forma and sample online application will help you comply with the new requirements.
To download copies of the regulatory guides, go to www.asic.gov.au/rg. See links in the table below for copies of the pro forma and sample online application.
Table 2: ASIC guidance for margin lending facilities

Preparing your licence application

  • Regulatory Guide 1 AFS Licensing Kit: Part 1—Applying for and varying an AFS licence (RG 1)
  • Regulatory Guide 2 AFS Licensing Kit: Part 2—Preparing your AFS licence or variation application (RG 2)
  • Regulatory Guide 3 AFS Licensing Kit: Part 3—Preparing your additional proofs (RG 3). This document is particularly important for issuers of margin lending facilities.
  • Pro Forma 209 Australian financial services licence conditions (PF 209)
  • Sample online application. The additional areas of the application that must be completed about margin lending facilities are:
    • Question A4—additional deal and advice authorisations for standard and non-standard margin lending facilities
    • Question A5—additional selection of margin lender to describe your business activities
    • Question B1.6—additional selection of margin lending to describe a responsible manager’s area of expertise
    • Question B3.1.8—new question asking whether you have made arrangements with issuers of margin lending facilities and retail clients to receive notifications of margin calls on behalf of retail clients
    • Question B3.2.3—additional options to select about functions to be outsourced, and
    • Question C10—new series of questions that must be completed by issuers of standard and non-standard margin lending facilities.

Meeting your licensing, conduct and disclosure obligations

  • Regulatory Guide 105 Licensing: Organisational competence (RG 105). We expect applicants to demonstrate the appropriate level of competence when applying for an authorisation to provide margin lending facilities.
  • Regulatory Guide 126 Compensation and insurance arrangements for AFS licensees (RG 126)
  • Regulatory Guide 146 Licensing: Training of financial product advisers (RG 146)
  • Regulatory Guide 165 Licensing: Internal and external dispute resolution (RG 165)
  • Regulatory Guide 166 Licensing: Financial requirements (RG 166). Issuers and advisers of margin lending facilities must comply with:
    • the base level requirements in Section B on issuers and advisers of margin lending facilities
    • the net tangible assets (NTA) requirements in Section C on issuers of margin lending facilities
    • the surplus liquid funds requirement in Section E on issuers of margin lending facilities where they hold client money or property, and
    • the adjusted surplus liquid funds (ASLF) requirements in Section F for issuers of non-standard margin lending facilities who have a liability to transfer marketable securities to the client.
  • Regulatory Guide 167 Licensing: Discretionary powers (RG 167)
  • Regulatory Guide 175 Licensing: Financial product advisers—Conduct and disclosure (RG 175)
  • Regulatory Guide 181 Licensing: Managing conflicts of interest (RG 181)

Step 2: Decide on the authorisation(s) you need

Look at the features of your margin lending facility and work out whether you need to select:

  • a standard margin lending facility authorisation
  • a non-standard margin lending facility authorisation, or
  • both.

A non-standard margin lending facility is where interests in marketable securities are transferred as part of the margin loan, such as in a stock lending arrangement.
If you are a financial planner providing advice only on margin lending facilities, you will most likely not be issuing margin lending facilities.
In your application, if you select ‘Deal in a financial product’ and then ‘Issue, apply for, acquire, vary or dispose of a financial product’ about to margin lending, you will be asked to answer a new series of questions about margin lending facilities (Section C10 of the application).

Step 3: Ensure you have responsible managers who can demonstrate the required competencies

You must nominate those responsible managers who have the competencies to be granted the authorisation for margin lending facilities. If you are varying your AFS licence and intend to nominate additional responsible managers to meet the competencies of the new authorisation you will first need to complete Form FS20 Change of details for an Australian financial services licence.

Step 4: Check your professional indemnity insurance

Before authorising you to provide margin lending facilities, we need to be satisfied that your professional indemnity insurance does not effectively exclude cover for margin lending facilities. You should check this with your insurance provider before lodging your application.

Step 5: Prepare your application and proofs

Before lodging your application for an AFS licence or a variation to an existing AFS licence, read Section E of Regulatory Guide 2 AFS Licensing Kit: Part 2—Preparing your AFS licence or variation application (RG 2), which explains how to submit your application and accompanying proofs.
RG 2 describes the core proofs you must submit with your application and any additional non-core proofs we may request as part of our assessment: see RG 2.233–RG 2.235.
At a minimum, you must lodge an ‘A5 Business Description’ core proof and a ‘B1 Organisational Competence’ core proof, which includes a ‘Table of Organisational Competence’.
Table 3: Preparing your proofs

A5 Business Description
(see RG 2.243–RG 2.248)

You must provide enough information in the A5 Business Description core proof for us to understand how your business works and the relevance of the licence authorisations you have selected (including any new authorisations).
You must:

  • describe the margin lending business you want authorised under the AFS licence
  • provide details of the particular types of products involved
  • document any relevant processes or measures you have implemented or developed specifically for the provision of margin lending facilities.

The matters that may be addressed in these documented processes or measures include:

  • assessment of a clients income
  • selection of margin lending products
  • gearing policy including loan to value ratios
  • risk mitigation
  • client contact procedures where acting as an agent
  • procedures for any deviation from these processes or measures.

RG 2.246 explains the level of detail and information which must be included in the A5 Business Description core proof.

B1 Organisational Competence
(see RG 2.283–RG 2.289 and RG 105)

You must provide enough information in the B1 Organisational Competence core proof for us to assess whether you meet the organisational competence requirements for the financial services and products for which you are applying.
This core proof includes a ‘Table of Organisational Competence’ and, if applicable, a ‘Submission on a Responsible Manager’s Competence’.
In preparing this information for margin lending facilities, you must:

  • specifically outline the relevant expertise and experience of your nominated responsible managers as it relates to margin lending
  • include details of any qualifications or courses, which cover margin lending or the underlying marketable securities over which margin loans have been issued, that your nominated responsible managers have completed.

Step 6: Lodge your application and pay the lodgement fee

You can apply online for an AFS licence with an authorisation to provide margin lending facilities.
Existing AFS licensees can apply for a variation to their licence to include authorisation to provide margin lending facilities by lodging a Form FS03 Application to vary the authorisation conditions and other conditions of an Australian financial services licence.

How will ASIC assess applications for margin lending facilities?

We will assess applications for new AFS licences or variations to existing AFS licences for margin lending facilities in the same manner and against the same criteria as we do currently for other financial services as set out RG 1–3, RG 105 and RG 166.

More information

Go to www.asic.gov.au/credit for more information about the changes to margin lending regulation, which are part of Australia’s national consumer credit regulation.

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