Chapter 2 Transfers and sales of ASIC licences
Introduction
2.1On 16 November 2022, the Australian Securities and Investments Commission (ASIC) suspended the Australian Financial Services Licence (AFSL) of FTX Australia, following the collapse of the US FTX cryptocurrency exchange and FTX Australia entering voluntary administration on 11 November 2022. On 23November 2022, The Guardian reported that FTX Australia had previously acquired an AFSL by taking over a company (IFS Markets) that already held an AFSL.
2.2The following ASIC responses to the committee's questions at a public hearing about how FTX obtained the ASIC licence raised significant concerns for the committee about the effectiveness of the regulation of transfers of ASIC licences:
…we strengthened our regulatory approach to those licences, and very few, if any, licences have been given out for quite some time now.
…the number of licences with that authorisation in the market now is very low.
That is one of the most difficult and highly prized licences in the market. As Chair Longo pointed to, our ability to scrutinise those off-market transfers of licences is very low to non-existent.
…within about five years that price had gone to $2 million. I haven't kept up to date with what the pricing of those things is now, but I would expect that number is way north of $2 million now.
2.3The committee has sought to better understand the broader issue of ASIC licence transfers via changes in control and other mechanisms. This chapter discusses:
ASIC’s current licensing role and process;
background on AFSLs;
changes in control of ASIC licences;
historical consideration of changes in control of licences;
other ways licences are transferred; and
the impact of licence application timeframes on licence transfers.
ASIC’s licensing role and process
2.4ASIC’s licensing function regulates entry of businesses into Australia’s financial system. Licensing is an essential element of ASIC’s regulatory toolkit to ensure financial service providers comply with legislation and that competition and innovation are supported under ASIC’s statutory mandate. ASIC’s licensing activities represent approximately one per cent of ASIC’s total appropriation.
2.5ASIC administers several types of licences, including AFSLs, credit licences, market infrastructure licences, licences under the Australian Consumer Law (ACL), and auditor and liquidator registrations. Licences are granted to applicants that meet the legislative criteria (or are approved by the Minister or their delegate).
2.6Once a licence application that meets the legislative requirements has been lodged, ASIC must grant a licence or registration unless it can substantiate grounds not to. ASIC’s licences and registrations are point-in-time assessments. In most cases, once a licence is granted, the licensee is not required to undergo periodic reassessment.
Background on AFSLs
2.7AFSLs are the most common type of ASIC licence. This section provides background information on who is required to hold an AFSL and the obligations that apply to AFSL holders. A person that provides financial services is required to hold an AFSL (or be a representative of an AFSL holder) if the person:
provides financial product advice to clients;
deals in a financial product;
makes a market for a financial product;
operates a registered scheme;
provides a custodial or depository service;
provides traditional trustee company services;
provides a crowd-funding service;
provides a superannuation trustee service;
provides a claims-handling and settling service; or
operates the business and conducts the affairs of a corporate collective investment vehicle.
2.8AFSL holders are obliged to provide efficient, honest, and fair financial services. AFSL holders must comply with the conditions of their AFSL and theCorporations Act 2001 (Corporations Act). AFS licensees have obligations relating to:
conduct and disclosure;
the provision of financial services;
the competence, knowledge, and skills of responsible managers;
the training and competence of financial advisers and authorised representatives;
ensuring financial advisers and authorised representatives comply with the financial services laws;
compliance, managing conflicts of interest and risk management;
the adequacy of financial, technological, and human resources;
dispute resolution and compensation arrangements for retail clients; and
enhanced financial obligations for some types of financial services.
2.9In approving a licence, ASIC is required to consider whether the applicant or any of the following people meet a fit and proper person test:
any officers of a body-corporate applicant;
any partners or senior managers of a partnership applicant;
any trustees or senior managers of a multiple trustee of a trust applicant;
any controller of the applicant;
if a controller is a body corporate, any officer of the controller; and
if a controller is a partnership, any partner, or senior managers of the controller.
Data on ASIC licence applications and transfers
2.10Figure 2.1 (below) indicates the number of licence applications received by ASIC in recent years. AFSL applications are the most common (~1000 p.a.), followed by credit licences (~400 p.a.), auditor licences (~100 p.a.), Self-managed super fund (SMSF) licences (<100 p.a.), and three types of market licences (a few p.a.).
Figure 2.1Applications for ASIC licences
Source: Financial Regulator Assessment Authority, Effectiveness and Capability Review of the Australian Securities and Investments Commission, July 2022, p. 62.
2.11The top row of Table2.1 (below) indicates that around 200 AFSLs are transferred each year. The committee requested information from ASIC on the numbers of transfers for other licence types (including credit, company auditor, SMSF auditor, market, benchmark and clearing and settlement licences). ASIC declined to provide information on the number of credit licence transfers, claiming that would cause an unreasonable diversion of ASIC resources. ASIC did provide information on transfers of other type of ASIC licences, as shown in Table 2.1.
2.12Figure 2.2 (below) indicates how many ASIC licence applications are approved, refused, withdrawn, rejected, cancelled, suspended, or are in progress each year. The committee asked ASIC for information on the number of instances in the last three years where an entity has acquired an ASIC licence through a transfer, where the entity previously had the same licence type application/assessment refused, withdrawn, rejected, cancelled, or suspended. ASIC declined to provide the above information claiming that preparing ‘a complete response to this question would cause an unreasonable diversion of ASIC's resources'.
Table 2.1Transfers of ASIC licences by change in control
| | | | |
AFSL | 211 | 220 | 268 | 98 |
Credit licences | Information not provided by ASIC, as ASIC considered it to be an unreasonable diversion of resources. |
Auditor registrations | 118 CEOs of the total of 211 Authorise audit companies have changed up to 3 March 2023. |
Market licences | 1 | 6 | 0 | 0 |
Benchmark operators | 0 | 0 | 0 | 0 |
Clearing & Settlement licences | 0 | 0 | 0 | 0 |
SMSF auditor registrations | Are personal to individuals and are not transferrable |
|
Source: Australian Securities and Investment Commission, answers to questions on notice, taken 5 December 2022 (received 16 January 2023); ASIC, answers to questions on notice 23 February 2023 (received 28 March 2023).
Figure 2.2ASIC licence assessment outcomes per year
Source: Financial Regulator Assessment Authority, Effectiveness and Capability Review of the Australian Securities and Investments Commission, July 2022, p. 76.
Transfer by change in control of ASIC licences
2.13One mechanism for a licence transfer is through a change in control (that is, if one company buys another or passes corporate control thresholds). For AFSLs, a licence condition requires that if an entity starts to control or stops controlling an AFSL, the licensee must notify ASIC of the change in control. A change in control includes a transaction or a series of transactions in 12 months that results in a person having control of the financial services licensee (either alone or together with associates of the person).
2.14An AFS licensee must notify ASIC of the particulars of the change in control by the end of 30 business days after the day the entity starts to control or stops controlling the AFS licensee. A failure to comply with the notification requirements is an offence under section 912DA of the Corporations Act. In some other international jurisdictions, such as Hong Kong and the United Kingdom, there are some approval processes for changes in control of entities that may apply to licence transfers.
2.15ASIC indicated that its role in assessing the new licence holder depends on how the licence was transferred:
If the purchase is of the shares of the business—so, therefore, they effectively take control of the licence—there's definitely no look at the people who are now the controllers of that licence. If there is a change of the relevant individuals, the key individuals subject to licence—responsible managers et cetera—we will consider very briefly whether or not they're suitable. Outside of that, the law as it stands at the moment does not allow us to do an assessment de novo of the new licence holder; it's something we've raised previously through previous reviews. We can see that in certain licensee types—derivatives from foreign exchange contracts are definitely one of those—that is highly problematic.
2.16ASIC noted limitations on assessing all licence transfers, including significant financial and resourcing impacts:
Effectively we have to wait to see if there are extenuating issues we have to look at after they've taken control of the licence. We think there is a benefit in it being a fresh application, but there would be real financial and resourcing issues for us if that was to happen for every transfer of a licence.
2.17ASIC indicated assessing all licence transfers, howeverchanges to the law could reduce the resource requirements for ASIC to assess licence transfers:
A change in the law in this area to provide for more engagement with ASIC on a change of control in a licensee would require significant additional resources. Similarly, under the current law additional engagement by ASIC is possible, but would require even more significant additional resources.
2.18ASIC approves approximately 1000–1400 new AFSLs each year, while about 200 AFSLs are transferred yearly, as indicated in Figure 2.1 and Table 2.1 above. Hence, in the committee’s reading, if AFSL transfers were to be automatically assessed by ASIC, that may increase ASIC's workload on AFSL assessments by approximately 20 per cent, depending on the complexity of the businesses involved.
2.19The committee asked ASIC what extra resources it would need to assess all AFSL transfers, that is, would it be approximately a 20% increase in resources applied to AFSL licencing and for other types of ASIC licences, including credit, company auditor, SMSF auditor, market, benchmark and clearing and settlement licences. ASIC responded that:
ASIC anticipates that it would require 3-4 full time equivalent (FTE) staff if we were to assess an additional 200 AFSL changes in control as if they were new applicants. With respect to credit licenses, we would have to provide an estimate. On the assumption that we receive approximately 30% new credit licence applications compared to AFS licence applications, we would estimate an additional 1 FTE.
Historical consideration of changes in control of licences
2.20On 20 November 2012, the then Treasurer, the Hon Joe Hockey MP, released a draft terms of reference for the Financial System Inquiry (the Inquiry) and appointed an independent committee charged with examining how the financial system could be positioned to best meet Australia’s growing economy. The Inquiry’s 2014 final report recommended that 'ASIC approval should be required for material changes in the ownership or control of a licensee'. The government response to the Inquiry stated that it would enable ASIC to:
approve changes of licensee control; and
consider a broader range of factors in determining whether an applicant satisfies the ‘fit and proper’ test to be granted a licence.
2.21On 19 October 2016, the then Minister for Revenue and Financial Services, the Hon Kelly O’Dwyer MP, announced a taskforce to review ASIC’s enforcement regime.In its 2017 report, the taskforce made 50 recommendations, including a recommendation to strengthen ASIC’s licensing powers by ensuring that it can refuse to grant a licence and can suspend or cancel an existing licence in appropriate circumstances. The ASIC enforcement review suggested that:
…following a change in control, licensees should provide ASIC with information to enable ASIC to assess whether the new controllers are fit and proper to control the licensee and the licensee continues to be competent to provide the relevant services and comply with its licence obligations.
2.22The relevant recommendations of the ASIC enforcement review were:
Recommendation 23, which stated that 'ASIC should be able to refuse a licence application (or, for existing licensees, take licensing action) if it is not satisfied controllers are fit and proper’.
Recommendation 28, which stated that ‘A statutory obligation should be introduced to notify change of control within 30 days of control passing, with penalties for failure to notify’
2.23Recommendation 28 was implemented in 2020 when section 912DA was added to theCorporations Actby Schedule 3 of the Financial Sector Reform (Hayne Royal Commission Response-Stronger Regulators (2019 Measures) Act 2020.
2.24An ASIC surveillance of licensees at the time of the Enforcement Review identified that 60 per cent of licensees had undergone a material change of control and, in 85 per cent of those cases, ASIC was not notified.
2.25ASIC advised the committee that following the publication of Report 482: Compliance Review of the retail Over-the-Counter (OTC) derivatives sector in June 2016, ASIC conducted a thematic review of retail OTC derivatives issuers in 2019. The review included, among other things, consideration of ASIC’s reporting of changes of control. The 2019 review found that the derivative issuers had reported to ASIC all changes of control occurring between January 2016 and April 2019.
2.26In2020, ASIC was also given the power to request information from licensees and determine whether they were still fit and proper to hold a licence. Assessment is not automatic when a licence changes owner. However, there is no requirement for an entity acquiring a licence to provide such information to ASIC automatically. ASIC described the amendments as follows:
Legislative amendments in February 2020 had the effect of changing the time period for a licensee to notify ASIC of a change in control, from no later than 10 business days after the licensee became aware of the change to before the end of 30 business days after the change of control occurred. Further amendments in February 2020 require ASIC to consider whether ASIC has no reason to believe a controller of an AFS licensee was not fit and proper when an application is made for an AFS licence, or to vary an AFS licence, and gave ASIC power to suspend or cancel an AFS licence if the fit and proper person test is not satisfied in relation to a licensee and the licence. In considering whether a person is fit and proper, ASIC must have regard to the matters set out in s913BB of the Corporations Act 2001, which include whether the person has had an AFS licence or Australian credit licence suspended or cancelled, whether a banning order has been made against the person, or whether the person has been convicted of an offence in the last 10 years (among other things).
2.27Since the February 2020 amendments, ASIC has not conducted thematic surveillance of compliance with the requirement to notify ASIC of a change of control. However, ASIC indicated that:
…where ASIC receives notification from a licensee of a change of control, ASIC may decide on a case-by-case basis whether to conduct risk-based surveillance to test whether the licensee is complying with its general licensee obligations. If ASIC finds that the licensee has not complied with its obligations, ASIC may take administrative action to suspend or cancel the AFS licence, or other regulatory action, as appropriate.
Other ways licences are transferred
2.28There are other ways (other than changes in control) in which an ASIC licence can be bought from another party. In response to questions from the committee, ASIC indicated that:
Most licences are held by body corporate entities, so transfer/acquisition occurs by a transfer of sufficient shares to a new controller. There are a small number of licences held by trustees, a change of control occurs where new trustees are appointed, and a small number are held by partnerships where control is held by the partners.
ASIC has heard of entities holding AFS licences being sold for over one hundred thousand dollars to millions of dollars. ASIC does not collect this information, as they are private commercial transactions.
The impact of license application time frames on licence transfers
2.29The Financial Regulator Assessment Authority (FRAA) first report on ASIC indicated that the FRAA has assessed ASIC’s receipt, processing, and granting of licences and registrations for regulated entities and individuals. In a future review of ASIC’s enforcement function, the FRAA will assess decisions relating to licence and registration variations, cancellations and conditions imposed.
2.30The FRAA report drew attention to stakeholder concerns about the time elapsed for processing ASIC licence applications. ASIC achieved most and just missed a few of its Service Charter Standards for licencing timeframes in recent years. ASIC processed 70 per cent of applications within 150 days and 90 per cent in 240 days. While ASIC was slower than its peers in Canada, Singapore, and Hong Kong, it was faster than its peers in Japan, the United Kingdom, and the USA.
2.31Stakeholders consulted by FRAA indicated that while many low-risk applications were processed relatively quickly, there were concerns about the processing time for complex applications. The FRAA contrasted ASIC licensing timeframes with improved service timeframes for Service New South Wales, the Australian Tax Office (ATO), and the corporate sector. For example, the FRAA noted similarities in the complexity of bank loan applications and ASIC licensing, which needed to be reflected in the different processing timeframes. The FRAA:
acknowledged the trade-off between timeframes and consumer protection (that is, faster processing may lower consumer protection);
noted that the ASIC licence portal upgrade and other projects may improve licence application timeframes;
suggested that ASIC could be more ambitious in seeking to reduce timeframes and learn from the experience of other organisations; and
encouraged ASIC to consider allocating more resources to licensing
2.32The committee sought further information from ASIC on what incentives may be motivating companies to acquire ASIC licences through transfers:
ASIC indicated that it did not have data to determine whether the timeframes for acquiring an ASIC licence by application compared to a licence transfer mean that some entities prefer to purchase a licence rather than apply for a new licence.
ASIC indicated that it did not have data on what portion of ASIC licence transfers occur because a transfer is quicker than a new application.
ASIC indicated that it did not have data on whether entities are acquiring licences to on-sell the licences and make a profit.
ASIC did advise that in one instance where it uncovered an applicant agreeing to sell the licence applicant before the licence was granted, ASIC took action and cancelled the licence. ASIC does not know if the applicant made a profit on the sale.
ASIC provided some information but was not able to assess whether reducing the wait times for ASIC licences reduces the incentives for licence transfers or the price of licence transfers:
ASIC does not have data on the time it takes to acquire an entity that controls a licence. ASIC assesses approximately 50 percent of AFS licences within 90 days, so it would depend on an applicant’s expectation as to the time it would take to acquire versus to apply for a licence.
Aside from the application fee, ASIC does not know what the quantum of other costs are for applying for a licence. ASIC indicated that as it does not know the price of acquiring a licence, it was unable to answer whether the price of acquiring a licence would fall if ASIC reduced wait times.
Committee view
2.33The committee acknowledges previous reviews and work on ASIC's licence arrangements, including:
the Financial System Inquiry in 2014;
the ASIC enforcement review in 2017;
legislative amendments in 2020 to:
require notification to ASIC of change of control within 30 days; and
giving ASIC power to suspend or cancel an AFS licence if the fit and proper person test is not satisfied with a licensee and the licence; and
the FRAA effectiveness and capability review of ASIC in 2022.
2.34However, the fact that before it collapsed, the FTX crypto exchange managed to buy and use a 'difficult and highly prized' AFSL for derivative and foreign exchange contracts raises significant concerns for the committee about the effectiveness of the regulation of transfers of ASIC licences.
2.35The committee is concerned that hundreds of ASIC licences are being transferred yearly with minimal oversight of whether the new owners have appropriate standing to hold an ASIC licence. The committee notes ASIC's observation that it would require significantly more resources to assess all licence transfers, and there would be costs to licence operators in participating in the process. To balance these concerns, the committee considers that, at a minimum, all high-risk licence transfers should be assessed by ASIC. The committee suggests that relevant high-risk licences are likely to include market licences, benchmark operator licences, clearing and settlement licences, and any AFSL or credit licence transfers that have high-risk features due to the scale or complexity of the service to be provided under the licence. The committee also notes that ASIC suggested some legislative changes that would reduce the resource requirements for ASIC to assess licence transfers. The committee encourages the government to consider those suggested legislative changes.
2.36The committee's consideration of transfers of ASIC licences has raised further concerns, including that ASIC does not have sufficient resources to assess the new owners of transferred licences and was not able to provide the committee with information on:
the economic incentives to buy rather than apply for ASIC licences;
the number of credit licences that are transferred each year; and
instances where an entity has acquired an ASIC licence through a transfer, where the entity previously had the same licence type application / assessment refused, withdrawn, rejected, cancelled, or suspended.
2.37The committee is particularly concerned that ASIC did not know if any entities with unsuccessful licence applications or suspended licenses could subsequently have acquired a licence through a transfer.
2.38The committee also notes there has not been any analysis of the reasons and economic incentives for companies to pursue licence transfers rather than applying to ASIC for a licence. The committee notes that in seeking to understand this issue, it may be helpful to identify the shares of licence transfers that occur to acquire the licences, versus licence transfers that are incidental to changes in control that happened for other reasons.
2.39To address the above issues, the committee is recommending that:
ASIC provides information in its annual report on licence transfers.
ASIC undertake and publish an audit to determine how many instances there are where an entity has acquired an ASIC licence through a transfer, where the entity previously had the same licence type application/assessment refused, withdrawn, rejected, cancelled, or suspended.
ASIC examine the transfer of all high-risk licences, including market licences, benchmark operator licences, clearing and settlement licences, and any AFSL or credit licence transfers that have high-risk features due to the scale or complexity of the service to be provided under the licence.
There be a review of the economic incentives for companies to pursue licence transfers rather than apply for ASIC licences undertaken by either Treasury, the FRAA or another body.
2.40The committee recommends that ASIC include information in its annual report on the numbers of transfers or changes in control that occur each year for each type of ASIC licence, including:
Australian Financial Service Licences;
Australian credit licences;
Australian auditor registrations;
market licences;
benchmark operator licences; and
clearing and settlement licences.
2.41The committee recommends that ASIC undertake and publish an audit to determine how many instances there are where an entity has acquired an ASIC licence through a transfer or a change in control, where the entity previously had the same licence type application/assessment refused, withdrawn, rejected, cancelled, or suspended.
2.42The committee recommends that ASIC examine the transfer or change in control of all high-risk licences including market licences, benchmark operator licences, clearing and settlement licences, and any financial service or credit licence transfers or changes in control that have high-risk features due to the scale or complexity of the service to be provided under the licence.
2.43The committee recommends that there be a review of the economic incentives for companies to acquire an ASIC licence through a transfer or change in control, rather than apply for that licence. This review should include potential changes to the law that may reduce the time and costs of licence applications and transfers for ASIC and industry.
Senator Deborah O'Neill
Chair