The Australian Securities and Investments Commission (ASIC) has released its second licensing activity report, detailing who has been applying for Australian Financial Services licences (AFSLs), liquidator registrations, company auditor and approved SMSF auditor registrations and credit licences, and what the outcome was between January and June 2015.
The report, Overview of licensing and professional registration applications: January to June 2015 , details how ASIC makes its decisions regarding licensing in the financial sector, and offers some insights into what’s been going on over the past six months.
One of the major points of interest for the insurance industry is the focus on digital advice (robo-advice), however the report also considers limited licensing, consumer leases and Centrepay, and ASIC’s recently announced Innovation Hub. It also covers Australian financial markets, clearing and settlement (CS) facilities, and derivative trade repositories (trade repositories).
Overview of licensing activity
- About 2,050 applications were assessed – 35 per cent were for new licences, 47 per cent relating to variations on an existing licence, and 18 per cent relating to professional registrations.
- Forty-seven per cent related to an AFSL and 35 per cent to an Australian Credit Licence (ACL).
- Less than half (48 per cent) of the applications assessed were approved.
- Fifty-seven per cent of those that were approved were altered from the original application.
- Nine AFSLs were suspended, 98 AFSLs were cancelled, and 192 credit licences were cancelled.
- 369 applications for professional registration as a liquidator or auditor were assessed.
Outcomes of applications
These applications include those that were rejected because they were defective, those withdrawn, modified, approved, and those with conditions imposed.
Retail OTC Derivatives – three applications denied
ASIC has been very active in disciplining this sector, however the regulator has also declined three applications recently: out of the three applications, one voluntarily withdrew after being advised they were going to be refused; the other two were refused at a hearing, with one subsequently appealing to the Administrative Appeals Tribunal (AAT), but then withdrawing the application and the case being dismissed by the AAT.
ASIC’s Innovation Hub
ASIC has set up its Innovation Hub, providing innovative start-ups with informal assistance in the early stages of company development specifically regarding licensing. This includes helping with pre-licence applications and licensing help during the first year of operation if necessary. Since April 2015, the Innovation Hub has had 32 meetings with new fintech companies, working with 22 new businesses.
Peer-to-Peer Lending (“Marketplace Lending”)
Marketplace lending is a growing area of the finance industry globally. ASIC has established a working group for this area to help address the risks and challenges that this new way of lending and borrowing create. An industry roundtable put it up for discussion in August to prepare guidance for operators on their legal obligations in business structure and advertising, and helping consumers understand the product.
A number of applications have been received for marketplace lending companies. The company structure in terms of the money side of things looks like an investor-directed portfolio service (IDPS), however ASIC noted that these marketplace lending platforms have characteristics of a managed investment scheme (MIS), so the companies looking for AFSLs require MIS authorisations. It is a somewhat complex area, since it has features of multiple products within it.
Digital Advice (“Robo-advice”)
Many AFSL applications were for digital advice businesses, with an increase being seen in this area following success overseas. With technological advances and the advent of sophisticated algorithms, digital advice allows financial product and service advice to customers on a reasonably individual level based on some broad compartmentalisations. A separate taskforce has been set up just for digital advice, called the Robo-advice taskforce, since, ASIC says, most digital advice initiatives will be coming from existing licensees, not start-ups.
Issues identified so far are compensation arrangements, training and competency, algorithms, and scaled advice in relation to best-interests duty. Advice may be specific or scaled, but must be in the best interests of the customer, which may be difficult for an algorithm to determine.
There are a multitude of services that use complex algorithms to make it seem like we are talking to a real person when we are not. Robo-advice must clearly state that the consumer is talking to a computer, and not a real person – it is not personal advice provided by an adviser, and cannot pretend to be so.
Accountants’ exemption and SMSF recommendations
Currently recognised accountants can offer self-managed superannuation fund (SMSF) advice without requiring an AFSL, however this exemption ceases to apply from 1 July 2016. ASIC has been warning accountants to get their applications in, however many accountants are not taking ASIC up on their offer: 160 accountants have applied, with just 70 licences granted, and many, many more accountants left without either a licence or a declined application. Extra training may be required, and the whole process may take some time to complete, particularly if more information is required.
Consumer leases and Centrepay
Leases have been in ASIC’s sights recently, particularly when they concern low-income consumers. Misconduct in the leasing industry is rife, with homewares and whitegoods leasers being particularly active. Some lessors were using the Centrepay system to ensure payment for leases out of welfare payments to reduce customer defaults, with a Department of Human Services (DHS) review finding the conduct of some lessors being ‘unconscionable’ and lacking in ‘any moral or ethical sensibility toward customers’.
Centrepay access is thought to be being used as a substitute for examining the consumer’s ability to pay, which is against responsible lending obligations. Consumers are also often paying four or six times the actual purchase price of the goods.