Australian Financial Services (AFS) licensees and authorised representatives providing financial advice are item 54 designated entities under the AML/CTF Act, meaning they do not have the same legal requirements as product providers. However, product providers still rely upon advice firms for a number of customer due diligence (CDD) requirements.
In its submission on the Australian Transaction Reports and Analysis Centre’s (AUSTRAC) draft outsourcing guidance, the Financial Advice Association Australia (FAAA) said that as advice firms are reporting entities themselves, they should not fall under the outsourcing guidance.
“Financial product providers rely on financial advisers to conduct CDD verification, reverification, and ongoing CDD of customers,” the FAAA said.
“This is in the form of one reporting entity placing reliance upon another. We consider this to be a different capacity to outsourcing and should be treated differently.
“We recognise that in the future, outsourcing may play an important role more broadly in providing item 54 businesses (AFSLs) with the opportunity to access services that may offer efficiencies and benefits in conducting CDD for reliance purposes, as well as meeting other item 54 AML/CTF obligations.”
The submission added that defining a standard for outsourcing arrangements is a “positive and welcome initiative that facilitates the use of good practices by outsourcing parties”.
However, it stressed that AUSTRAC should provide clear definitions of outsourcing versus reliance arrangements.
“For example, a differentiating factor of an outsourcing arrangement could be a ‘service provided for payment’ to assist the reporting entity to meet their AML/CTF obligations (e.g. a digital identity verification service or AML/CTF platform),” the submission said.
“Equally important, in the context of an item 54 reporting entity undertaking CDD that is relied upon by a financial product provider, a reliance arrangement is understood by AFSLs as the item 54 reporting entity undertaking AML/CTF procedures (e.g. CDD) to meet their own obligations, and this is then accepted and relied upon by another reporting entity that has assessed and approved the advice AFSLs AML/CTF procedures.”
The FAAA added that the provision of financial advice under the licensing regime in the Corporations Act is “unique”.
“This is why AFSLs that provide financial advice only fall into the unique AML/CTF category of an item 54 reporting entity,” it said.
“The arrangements between AFSLs and product providers are equally unique. Under the Corporations Act, product providers are required to conduct due diligence on the advice AFSL prior to permitting the distribution of their financial products through the AFSL’s advisers.
“The product provider/AFSL/adviser distribution channel is heavily regulated under corporations and financial services law.”
The advice AFSL/product provider relationship, it added, also operates under AUSTRAC’s existing guidance on reliance.
“We are concerned that the application of the proposed outsourcing guidance to these relationships will create confusion and potentially duplicate existing obligations for reporting entities (advice AFSLs),” the FAAA said.
