So you want to buy an AFSL

Buying an AFSL is not a simple transaction and needs to be explained.

1. Why you just can’t buy an AFSL

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ASIC issues AFSLs to a body corporate or an individual based upon ASIC’s assessment of:

• the applicant and those associated with it to ensure that they are fit and proper;
• the knowledge and skills of the nominated responsible managers;
• the compliance arrangements and risk management systems of the applicant; and
• the adequacy of the resources (human, financial and technological) of the applicant.

Licences cannot be transferred to another person or company even if they are related.

2. Beware of risks associated in buying a company

You can’t buy a licence, but you can buy the entity (e.g. a company) that holds the licence. As with any purchase of a business, there are risks in acquiring an existing business. Undertake appropriate due diligence to reduce the risk of unforeseen or undisclosed liabilities also being acquired. Any due diligence should also include a detailed review of the AFSL business to ensure that there are no potential claims or breaches that may impact the licence.

Though a due diligence does add to the cost and process, this investment in the process may prevent potential costs in the future.

3. Review the licence authorisations

AFSLs are quite lengthy and are issued with authorisations and conditions. It is important to review the licence to determine what the licensee is authorised to do and what conditions it is subject to. The authorisations enable the licensee to conduct financial services across a range of financial products which are detailed in the authorisations. This will also include whether the financial services can be provided to retail or wholesale clients (or both), which is also critical.

The licence conditions include many standard conditions, which are detailed in ASIC Proforma 209, but may include other conditions such as a condition noting that ASIC considers a person (one of the responsible managers) is considered to have important knowledge and skills to provide a financial service in a particular financial product or products. This is commonly headed “keyperson condition”. Other critical conditions include a compliance audit condition that may have been imposed due to past breaches.

We’ve seen businesses buy an existing licensee, only to discover that its licence doesn’t quite cover the activities they wanted to undertake. They paid a premium to get the business going quickly, only to find out they paid more than a new AFSL application would cost, and it will take longer to vary the purchased entity’s licence than if they’d simply applied for a new AFSL. Don’t make that mistake! If the licence does not have adequate authorisations or includes a keyperson condition, then a licence variation will be required post settlement resulting in additional costs and risks associated with this transaction.

4. Who will demonstrate organisational competence?

ASIC assesses the knowledge and skills of the nominated responsible managers when granting an AFSL. More often than not, ASIC will issue an AFSL subject to a keyperson licence condition which states that ASIC must be notified within five business days of that person ceasing to be employed or engaged by the licensee.

It is critical that the purchaser of the licensee either negotiate for the nominated responsible managers to remain with the licensee post settlement or they employ or engage responsible managers with the appropriate knowledge and skills to replace those currently nominated on the licence. If there are no keypersons noted on the AFSL, the Licensee is required to advise ASIC of the cessation or appointment of responsible managers within 10 business days.

If the licensee needs to engage responsible managers external to the company, it is recommended that the responsible manager be engaged to perform the duties of a responsible manager and not have other roles or duties that may raise a conflict.

5. Obligations of the purchaser

Post settlement, ASIC will need to be advised of any changes to the responsible managers. ASIC will also need to be advised of any changes of trading names, addresses, contact details and potentially appointed auditor. Similar notifications will also be required to update the companies register.

Most importantly, as a company and an AFS licensee, the licensee will be separately required to advise ASIC of a change in control.

If the licence is subject to a keyperson condition, a licence variation will be required to change the keyperson or remove the condition if a number of new responsible managers have been appointed.

6. Will ASIC review documents?

The submission of a change in responsible managers will result in ASIC reviewing the impact of the change to ensure that the licensee has organisational competency to undertake the financial services authorised on the licence. ASIC will assess the change of control to determine whether those now associated with the Llicensee, including the new parent entity are fit and proper.

ASIC may review the change in responsible managers very closely and may determine that the new responsible managers don’t have the appropriate skills and knowledge, resulting in the removal of licence authorisations or cancellation of the licence. Submitting appropriate documentation highlighting the knowledge and skills of each of the new responsible managers is critical to ensure that ASIC does not form a negative view of this change in responsible managers.

Should a licence variation be required to be submitted to add licence authorisations or amend the keyperson condition, the licensee will be required to submit a range of documents as part of this process which will need assessment by ASIC. The variation application will need to be accompanied by a fit and proper declaration along with police and bankruptcy checks and statements of personal information for each officer and senior manager of the Licensee and its controlling entity.

7. How much does it cost to buy an existing AFSL? Is purchasing an AFSL worth it?

Purchasing a company with an AFSL can be an expensive and time-consuming process. The costs will be more than the purchase price of the company, so the risks should be carefully considered.

The purchase price depends a lot on the sector:

1. Some licences are hard to obtain – like licences that allow a person to issue Contracts For Difference (CFDs), which are a form of over-the-counter derivative, to retail clients. These are also known as “market maker” licences. We have assisted clients undertake due diligence on these types (and other types) of business, and have seen purchase prices in the millions of dollars for a business with relatively low turnover.
2. Some licences aren’t worth much. In 2019, the Commonwealth Bank sold Count Financial to CountPlus for $2.5 million. It had 359 advisers. To sweeten the deal, the Commonwealth Bank also provided the buyer with $200 million to cover remediation of past misconduct.
3. Some licensed businesses are simply more expensive and time consuming to buy than applying for a new licence. In our experience, applying for a new AFSL costs between $10,000 – $60,000 depending on its complexity. That doesn’t include getting all the legal documents in order, but if you buy a new business, you’ll want to review its legal documents anyway.

Any subsequent costs incurred in appointing responsible managers and amending the licence will also add to cost and length of the process.

Frank Varga, head of licensing, and Paul Derham, partner, Holley Nethercote