What are the financial requirements for Dormant AFS licensees?

Australian Securities & Investments Commission (“ASIC”) recently issued Report 769, their response to submissions on ASIC’s recent consultation paper on financial requirements for AFS licence holders.

One of ASIC’s responses in Report 769 addresses the frequently encountered issue related to the financial requirements of dormant AFS licensee.

“Some respondents raised the “dormant AFS licensee” scenario – where an AFS licensee holds a licence authorisation to provide a type of financial service, but does not provide that service.        

One respondent recommended that a responsible entity, IDPS operator or corporate director of a retail CCIV should not be required to hold NTA unless and until they operate a registered scheme, IDPS or retail CCIV, as the case may be”

As an Australian Financial Services Licence (“AFS licence”) holder, the licensee has legal obligations under the Corporations Act 2001, in addition to the conditions specified in the licence and RG166 requirements.

One of the commonly seen scenarios in practice involves a dormant custodian. Some licence holders are authorised to provide custodian services, but they either intend to outsource these services to authorised third parties or choose not to provide such services to customers.

ASIC confirmed their view that the Net tangible assets (NTA) requirement takes effect when the AFS licensee holds the licence authorisation to provide financial service, rather than whether the AFS licensee actually provides financial services covered by that authorisation.

ASIC further noted that the financial requirements already accommodate smaller AFS licensees, or AFS licensees that have low levels of business activity under their licence authorisations, through less onerous NTA requirements.

For instance, a dormant custodian would fall within the definition of an “incidental provider”; and consequently, a lower Net Tangible Assets (NTA) requirement would be applicable in such cases. See the table below for the details:

*An incidental provider may still be obligated to meet the NTA requirements for other financial services for which they are authorised as a licensee. 

An “Incidental Provider” is defined in RG 166 as a licensed custodial or depository service provider that does not provide any custodial or depository services which: 

• are need of the person to whom the services are provided because of, or in order to obtain the provision of other financial services by the licensee or its related bodies corporate; and   
• do not form part of an Investor directed portfolio services (IDPS).

Furthermore, for these custodial or depository services, the revenue must be less than 10% of the provider’s total financial services business revenue (RG166.177)

The response in the ASIC Report 769 clarifies the financial requirements for dormant AFS licensees. Accordingly, ASIC maintains its position that the financial requirement become applicable when an AFS licensee holds a relevant licence authorisation, regardless of whether the licensee is offering the particular product or service at that time.

It is important to note that ASIC has the authority to cancel an AFS licence if the licensee has not commenced its business within six months of being granted an AFS licence, and/or if the licensee has ceased to carry on a financial service business.

Financial requirements for AFS licensees are summarised below:

RSM Australia provides specialised audit services tailored to the Australian Financial Services (AFS) licence holders. 

With a deep understanding of the financial service industry, our specialised team focuses on delivering comprehensive compliance audits for AFS holders to ensure the regulatory requirements are met. 

For More Information

For further information about the AFS licence compliance audit, please contact Nicky Kaindlbauer or your local RSM adviser.