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Background Checking for ASIC Compliance (AFS)

Background

The Financial Services Reform was the sixth stage of the Government’s Corporate Law Economic Reform Program. Enacted in September 2001, it consolidated and reformed the regulations of the financial services sector and covered most financial products and services.

As part of this reform, the Financial Service Reform Act 2001 (FSR Act) commenced in March 2002. The FSR Act amended the Corporations Act 2001 and imposed the Australian Financial Service Licence (AFS Licence). This single licensing regime regulates financial sales, advice and dealings in relation to financial products, rather than the separate licensing requirements for various products that previously existed.

Organisations applying for an AFS Licence are required to nominate responsible managers. As part of the ongoing compliance requirements of AFS licensees and licence applicants, the Australian Securities and Investments Commission (ASIC) issued Regulatory Guide 105 – Licensing: Organisation Competence (RG 105), which outlines what ASIC looks for when assessing compliance with the organisational competence obligation under s912A(1) of the Corporations Act 2001.  

What does ASIC require of AFS Licensees?

RG 105 advises that an AFS Licensee must ensure that it maintains competency to provide the financial services covered by its AFS Licence, by:

  • Reviewing its competence regularly or when the business activities or responsible managers change;
  • Maintaining and constantly updating the skills and knowledge of its responsible managers;
  • Retaining records with regards to reviewing and steps taken to ensure organisational competence.

Who are responsible managers?

Responsible managers are defined as “the people who manage your financial services business”. RG 105 advises ASIC “assess[es] your compliance with this obligation [organisational competence under s912A(1)(e)] by looking at the knowledge and skills of your ‘responsible managers’”.

The onus is on AFS Licensees to ensure that the combined knowledge and skills of responsible managers covers competency in and understanding of the legal/compliance obligations relating to all financial products offered.

An individual can be a responsible manager if they:

  • are “directly responsible for significant day-to-day decisions about the ongoing provision of…financial services”; ie those who decide how financial services and products offered will be provided, rather than the individuals who will actually be providing the services;
  • meet certain criteria for demonstrating skills and knowledge required in the financial services and products their role relates to; and
  • are “of good fame and character”.

How should responsible managers be nominated?

AFS Licensees are required to nominate responsible managers at the point at which they apply for their licence.

There are five options for demonstrating that a responsible manager possesses appropriate knowledge and skills, which include a variety of experience and qualification combinations. Generally, each of the five options includes:

  • Knowledge (completion of relevant training, ie degree, industry or product-specific qualifications equivalent to a diploma, knowledge assessed by an assessor); and
  • Skills (a minimum years of relevant experience, eg 3 years over the past 5 or 5 years over the past 8).

An AFS Licensee is expected to nominate a minimum of two responsible managers (although there are exceptions where one responsible manager will suffice), with a maximum of 20 able to be appointed at one time. The number of responsible managers required will vary depending on the nature, size and complexity of each business. If ASIC assesses that the organisation relies heavily on certain responsible managers, it may impose key person licence conditions that regulate the replacement of that role and competencies covered, should the responsible manager leave the business.

What if an individual is an APRA responsible person?

For AFS Licensees regulated by APRA, those holding responsible persons roles would have direct responsibility for day-to-day decisions and would therefore be nominated as responsible managers for the purpose of ASIC compliance.

One of the options for confirming appropriate knowledge and skills of responsible managers relates to meeting industry standards, which include APRA standards. This means that ASIC will accept a standard set by APRA if the AFS Licensee is also regulated by APRA and that particular standard is relevant to the responsible manager’s role. RG 105 gives the example that “if you are a general insurer regulated by APRA, we will accept that a person who is a ‘responsible person’ for the purposes of APRA’s Prudential Standard GPS Fit and Proper has appropriate knowledge about dealing in general insurance products”.

ASIC reporting obligations

When an organisation applies for an AFS Licence, it must demonstrate organisational competence, including nominating responsible managers and answering questions about the roles they hold and their training and experience (including which of the five options for compliance they meet). Proof must be provided regarding each responsible manager meeting one of the options, as well as proof that together they have the appropriate knowledge and skills to cover all financial services and products the Licensee offers.

If a licence is varied, responsible managers may need to be added to cover additional products that will be offered. If any responsible managers are added or removed, ASIC must be notified so it can updated its register of licensees.

What types of background checks are required?

RG 1.32 outlines the “people proofs” that ASIC requires to be provided for each responsible manager when they are initially appointed or added by an AFS Licensee. These people proofs have been specifically selected in order to assist ASIC to determine whether the responsible manager is of “good fame and character”.

If the AFS Licensee is a body regulated by APRA, it does not need to provide a copy of the bankruptcy or national criminal history check or undertake the business references.

The specific background checks that can assist in meeting the requirements of these ‘people proofs’ are outlined below:

ASIC People Proof Background Checks ASIC Guidelines
ASIC Compliance Background Checking
Signed statement of personal information Documentation only This statement can be obtained from the ASIC eLicensing system
Copies of qualifications Qualification/Professional Validation (direct with awarding institute) All relevant qualifications

For overseas qualifications, Australian equivalency must be proven

Copy of a bankruptcy check Bankruptcy Check Must be a national check, no more than 12 months old
Copy of overseas bankruptcy check, in countries where the responsible manager has resided for longer than 12 months in the past 10 years Overseas bankruptcy check (where possible) Must be a national check where possible, or a state-based check undertaken based on address history

Where not possible, a signed statement must state the responsible manager has not been bankrupt and detailing the efforts taken by the AFS Licensee to have this check undertaken

Copy of a National Criminal History check National Police Check Must be a national check, no more than 12 months old
Copy of overseas police history check, in countries where the responsible manager has resided for longer than 12 months in the past 10 years

 

Overseas Police Check (where possible) Must be a national check where possible, or a state-based check, undertaken based on address history

Where not possible, a signed statement must confirm that the responsible manager does not have a criminal record and detailing efforts taken by the AFS Licensee to have this check undertaken

Copy of two business references ASIC Business Reference Taken within the past 12 months, with at least one reference from outside of the responsible manager’s current organisation.  Responsible managers within the same AFS Licensee cannot provide references for each other.

References must be signed and dated, clearly outlining the name and title of the referees and include information as to the individual’s duties in connection to the financial services and products that the AFS Licensee is applying for or is already registered to offer. It must also confirm whether the responsible manager is of good fame and character.

Recommendations for compliance

Background checking for responsible managers should be undertaken based on ASIC’s framework in the regulatory guides in terms of required people proofs. However, the number and type of qualifications to be validated will vary based on each responsible manager role and the qualifications deemed as “relevant” to the financial services and products offered by the AFS Licensee. Additionally, dependant on a candidate’s background and residency history, an overseas bankruptcy and/or national criminal history check may be required by ASIC. This being the case, background checks undertaken for each responsible manager should be assessed on a case-by-case basis in order to ensure full compliance with ASIC’s requirements.

More information

For more information on how PeopleCheck can assist with background checking to meet your ASIC compliance requirements and for best practice recommendations customised for your organisation, please contact us on      (02) 4023 0603 or solutions@peoplecheck.com.au.

References

  • Regulatory Guide 105 – Licensing: Organisational Competence, October 2007
  • Regulatory Guide 1 – AFS Licensing Kit: Part 1 – Applying for and varying an AFS licence, July 2015
  • Regulatory Guide 2 – AFS Licensing Kit: Part 2 – Preparing your AFS licence or variation application, July 2015
  • ASIC – www.asic.gov.au

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