Background
Companies that offer financial advisory services must hold an Australian Financial Services licence (“AFS licence”). If they employ financial advisors, they can appoint them as “authorised representatives”. Bodies corporate, partnerships or trustees can also be appointed as authorised representatives.
Companies that offer mortgage broking services must hold a credit licence with the National Credit Code (“credit licence”). If they employ mortgage brokers, they can appoint them as “credit representatives”.
The obligations for authorised representatives of AFS licence and credit licence holders are the same.
When appointing an authorised representative or credit representative, there are requirements for background checks, for the licensee (i.e. company) to ensure the representative is adequately trained, and that there are adequate systems and procedures in place for monitoring and supervising their representatives. Appointments must be made with written consent.
Is there a disclosure obligation?
AFS and credit licensees must report all ‘reportable situations’ to ASIC.[1]
It is automatically considered to be a ‘reportable situation’ if an AFS or credit licensee has committed:[2]
- A dishonesty offence under any law that has a maximum penalty of 3 months’ imprisonment or more, or
- Any offence under any law that has a maximum penalty of 12 months’ imprisonment or more.
Failure to report to ASIC in accordance with the obligations is an offence and can lead to criminal or civil penalties.[3]
Who has the obligation?
This obligation attaches to the licensee itself, not to the authorised representative or credit representative. However:[4]
“[l]icensees must have robust arrangements in place with their authorised representatives and credit representatives… that are effective in identifying, recording and escalating possible breaches by an authorised representative or a credit representative, and ensure appropriate supervision in respect of these arrangements.”
The legislation does not prescribe what these reporting arrangements will be, meaning the authorised representative or credit representative will have to refer to their company’s policy and/or employment contract.
When does the obligation arise?
A report must be lodged with ASIC within 30 calendar days after the licensee first knows that, or is reckless with respect to whether, there are reasonable grounds to believe a reportable situation has arisen.[5]
Knowledge and recklessness are defined in accordance with their definition in the Commonwealth Criminal Code.
What is “commission of an offence”?
This phrase is not defined in either legislation.
However, the Regulatory Guide RG 78 provides an example:
“For example, if the licensee identifies, after complaints have been lodged by clients, that an authorised representative has given advice to clients to dishonestly obtain client funds and use them for personal expenses or other purposes, the licensee must report that breach to ASIC.”
This shows that the obligation arises upon the licensee identifying that client funds had been dishonestly obtained.
Therefore:
- The obligation arises when the authorised representative or credit representative reports the breach (in accordance with their company policy or employment contract) to the licensee.
- At this point, the licensee is required to report the breach within 30 calendar days.
- Of course, if they were aware of the breach earlier, or reckless with respect to whether there were reasonable grounds to believe a breach had occurred, the obligation arises earlier.
Implications of disclosure
Once the authorised representative or credit representative reports the breach, the licensee is required to report it to ASIC within 30 days.
Once ASIC receives the report, they may contact the licensee for further information. They do not take action on all reported matters, and will only contact the licensee company if they consider it necessary to do so.
However, the licensee is bound by ASIC’s reference checking and information sharing protocol. If the authorised representative or credit representative is to change jobs and work as in the same capacity at another AFS or credit licensee (“recruiting licensee”), then their current employer (“referee licensee”) is required to share information with the recruiting licensee about them when recruited.
One such piece of information that the referee licensee is required to share is if they reported a breach to ASIC in respect of the representative, and if yes, to provide details of the breach.
The recruiting licensee is required to ask the authorised representative or credit representative for consent to request a reference, and they are within their rights to deny consent. While they can still be employed by the recruiting licensee, the recruiting licensee is required to be able to demonstrate that they complied with their general conduct obligations in employing the representative. This may mean that they do not employ the representative if they decline consent.
Conclusion
If an AFS or credit representative has been convicted of a dishonesty offence punishable by a maximum of three months’ imprisonment or any offence punishable by a maximum of 12 months’ imprisonment, then they may be required to report this to their employer (i.e. an AFS or credit licensee).
Consequently, the AFS or credit licensee must report this to ASIC, who may investigate it.
Even if ASIC do not investigate the breach, the employer will be required to disclose it to any recruiting AFS or credit licensee if the representative applies for a new job.
How ROG can help
We can provide specialised advice regarding your reporting obligations and any investigations by ASIC.
For assistance, please contact our office at (07) 3034 0000.
[1] Corporations Act 2001 (Cth) s 912DAA (“Corporations Act”) and National Consumer Credit Protection Act 2009 (Cth) s 50B (“National Credit Act”).
[2] Corporations Act 2001 (Cth) s 912D(4)(a) and National Credit Act s 50A(4). See also Corporations Act s 912D(1)(a) and National Credit Act s 50A(1)(a).
[3] Corporations Act s 912DAA and National Credit Act s 50B.
[4] Regulatory Guide RG 78.
[5] Corporations Act s 912DAA(3) and National Credit Act s 50B(4).