Dover Financial disaster highlights risks for AFSL authorised representatives

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Thursday, June 21, 2018

Venn King Crop

KHQ’s Corporate and Commercial team members Venn King, Special Counsel, and Clea Cole, Lawyer, discuss how Dover Financial left 400+ financial planners in the lurch and how the case highlights risks for AFSL authorised representatives Australia-wide.

Clea Cole

Ongoing investigation by the Australian Securities and Investments Commission (“ASIC”) into Dover Financial Advisers Pty Ltd (“Dover Financial”, one of Australia’s largest financial planning businesses) has highlighted the risks associated with becoming an authorised representative under another party’s Australian financial services licence (“AFSL”).

An authorised representative is an individual, body corporate or partnership, which provides particular financial services or products on behalf of an Australian financial services licensee.

Dover Financial is such a licensee and on 8 June, CEO Terry McMaster (who collapsed in April whilst giving evidence at the banking royal commission) emailed the group’s financial planners informing them that, in accordance with the terms of an agreement reached with ASIC:

  • they would no longer able to provide new financial advice under the company's AFSL;
  • the business’ AFSL would be cancelled from 6 July; and
  • the appointment of its authorised representatives would be terminated

This means that affected planners now have a month to move across to a new AFSL holder or risk being removed from ASIC’s register of financial advisers. This demonstrates that whilst there are a range of advantages associated with being an authorised representative on someone else’s AFSL, there are significant disadvantages. Below is a brief summary.

Advantages

  • Infrastructure and support - authorised representatives are generally provided with the support and infrastructure needed to run a financial services business (eg IT support, technical training, and compliance and legal support).
  • Brand presence - large licensees (like Dover Financial) tend to have a strong industry presence and credibility. Authorised representatives can leverage this, including by making use of their licensee’s leads and industry contacts.
  • Liability - licensees are responsible for the conduct of their authorised representatives, and accordingly may be liable for any loss or damage caused by an act or omission of an authorised representative, unless an exception applies (for example, if the authorised representative acts outside the scope of their authorisation).
  • Cost effective - owning your own AFSL comes at a cost, which authorised representatives can significantly reduce by operating under someone else’s license. In our experience, businesses can spend up to $50,000 to obtain an AFSL, with ongoing compliance and operational costs.

Disadvantages

  • Dependency - as highlighted by Dover Financial, an authorised representatives can be out of business on short notice unless they can quickly find another AFSL holder to act as licensee.
  • Lack of flexibility or control - the most obvious disadvantages are that licensees have greater control and flexibility over their own business and professional practice. Authorised representatives have limited control over their own business operations and must adhere to the compliance arrangements of their AFS licensee and resolve client complaints in accordance with the licensee’s policies, which may ultimately impact on an authorised representative’s client relationships.
  • Revenue retention - authorised representatives are also required to dip into their revenue by paying ongoing administration fees to a third party AFS licensee.


Clea Cole is a lawyer in the KHQ Corporate & Commercial team. She has a broad range of experience across mergers and acquisitions; restructures, corporate governance, competition and consumer law, financial services and licensing, drafting and negotiating all forms of commercial agreements, compliance advice, and intellectual property. Contact Clea at ccole@khq.com.au.

Venn King is a special counsel in the KHQ Corporate & Commercial team and specialises in mergers and acquisitions, corporate and investment structuring, financing and advisory work, and general corporate advice, including a significant regulated element. Contact Venn at vking@khq.com.au.

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